economic test questions 1· The income elasticity of demand for luxuries tends to

Question

economic test questions

1· The income elasticity of demand for luxuries tends to be a greater than 1 b. less than 1 c. equal to 1. d. equal to 0. 2. Demand for a good would tend to be more inelastic the a, fewer the available substitutes. b. longer the time period considered. c. more the good is considered a luxury good. d. more narrowly defined the market is. 3. Suppose the price of Twinkies is reduced from $1.50 to $1.25 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. The price elasticity of demand for Twinkies in the given price range is approximately a. 2.00 b. 0.60 c. 1.00 d. 1.64

Explanation / Answer

Ans:

1) Option A

Greater than 1

Luxury goods are normal goods whose income elasticities of demand greater than one.Luxury goods have higher income elasticity of demand.An increase in income will increase the demand for luxury goods.

2) Option A

fewer the available substitutes

Inelastic demand means  when the price of that good changes the  quantity demanded of a good is unaffected.Hence when the demand for a good is inelastic it has fewer substitutes.

3) Option B - 0.6

Price elasticity of demand = % change in quantity / % change in price

= 10% / -16.67%

= - 0.6

% change in quantity = (2200 - 2000) / 2000

= 0.1 or 10%

% change in price = (1.25 - 1.5) / 1.5

= - 0.25 / 1.5

= -0.1667 or 16.67%

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