Kevin and Sarah are working on pricing for their gourmet dinner home delivery bu

Question

Kevin and Sarah are working on pricing for their gourmet dinner home delivery business. Even though they are targeting affluent families, they know that price is important to their potential customers. Kevin is a great cook but has little training in economics or accounting and knows nothing about elasticity. He looked up elasticity on Google and found tons of stuff but is not sure what is, and is not, correct. Help Kevin out -- which of the following is TRUE about elasticity?

1) Elasticity measures the consumer's response to changes in price

2) Elasticity is calculated using the percent of change in demand (quantity) compared to the percent of change in price.

3) If the coefficient of elasticity is greater than I then the product is inelastic.

4) All of these are accurate

5) Only A and B are accurate

Explanation / Answer

The correct option is 5) Only A and B are accurate

Price elasticity of demand measures the receptiveness of demand to changes in price for a particular good. If the price elasticity of demand is equal to 0, demand is perfectly inelastic (i.e., demand does not change when price changes). Values between zero and one indicate that demand is inelastic. So, if the coefficient of elasticity is greater than 1 then the product is elastic.

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