Identify the item most likely to be a luxury good among the four mystery itemsmultiple choiceItem A: price elasticity of demand = −2.3Item B: price elasticity of demand = −1.0Item C: price elasticity of demand = −0.8Item D: price elasticity of demand = −0.2
Question
Identify the item most likely to be a luxury good among the four mystery itemsmultiple choiceItem A: price elasticity of demand = −2.3Item B: price elasticity of demand = −1.0Item C: price elasticity of demand = −0.8Item D: price elasticity of demand = −0.2
Solution
The price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a change in its price. A good is considered a luxury if a change in price leads to a more than proportionate change in quantity demanded. This is reflected in a price elasticity of demand that is greater than 1 in absolute value.
Looking at the four items:
- Item A: price elasticity of demand = -2.3
- Item B: price elasticity of demand = -1.0
- Item C: price elasticity of demand = -0.8
- Item D: price elasticity of demand = -0.2
The price elasticity of demand for Item A is -2.3, which is greater than 1 in absolute value. This means that a 1% increase in price leads to a 2.3% decrease in quantity demanded, indicating that it is a luxury good.
Therefore, Item A is most likely to be a luxury good.
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