ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Price falls 5% demand rises 3%
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Price rises 5% and demand rises 3%
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Price falls 5% and demand rises 10%
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Price rises 5% and demand rises 10%
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Detailed explanation-1: -The correct answer is: A. A 10% rise in price leads to a 5% decrease in quantity demanded. Hence in the above case the demand for the good is inelastic.
Detailed explanation-2: -Inelastic demand occurs when the ratio of quantity demanded to price is between zero and one unit elastic. This typically occurs when a particular good or service lacks adequate substitutes and represents a necessity. Examples of goods with inelastic demand include gasoline, necessary foods, and prescription drugs.
Detailed explanation-3: -If the price for an inelastic good is lowered, the demand for that good does not increase, resulting in less overall revenue due to the lower price and no change in demand. This would indicate that the firm should not reduce the price of its goods as there is no beneficial outcome in doing so.
Detailed explanation-4: -The most common goods with inelastic demand are utilities, prescription drugs, and tobacco products.
Detailed explanation-5: -Petrol – petrol has few alternatives because people with a car need to buy petrol. For many driving is a necessity. Salt. A good produced by a monopoly. Tap water. Diamonds. Peak rail tickets. Cigarettes. Apple iPhones, iPads. 04-May-2019