Multiple Choice
Studies show that the demand for gasoline is typically which of the following, and why (based on determinants of price elasticity of demand)?
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4. Elasticity
Determinants of Price Elasticity of Demand
Multiple Choice
Which of the following is NOT generally considered a determinant of the price elasticity of demand for a good?
A
The firm’s accounting profit in the previous quarter
B
The amount of time consumers have to adjust to a price change
C
Availability of close substitutes
D
The share of the consumer’s budget spent on the good
Verified step by step guidance1
Understand that the price elasticity of demand measures how much the quantity demanded of a good responds to a change in its price.
Recall the common determinants of price elasticity of demand, which typically include: availability of close substitutes, the share of the consumer's budget spent on the good, and the amount of time consumers have to adjust to a price change.
Analyze each option to see if it logically affects consumers' responsiveness to price changes. For example, availability of close substitutes makes demand more elastic because consumers can easily switch to alternatives.
Consider the share of the consumer's budget spent on the good: goods that take up a larger portion of the budget tend to have more elastic demand because price changes are more noticeable.
Evaluate the firm's accounting profit in the previous quarter: this is related to the firm's financial performance and does not directly influence how consumers respond to price changes, so it is NOT a determinant of price elasticity of demand.
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