Multiple Choice
Which of the following statements about price elasticity of demand on a graph is correct?
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4. Elasticity
Price Elasticity of Demand on a Graph
Multiple Choice
On a demand curve, a luxury cruise will exhibit which type of price elasticity of demand?
A
Perfectly inelastic
B
Relatively elastic
C
Relatively inelastic
D
Unit elastic
Verified step by step guidance1
Understand the concept of price elasticity of demand, which measures how much the quantity demanded of a good responds to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price, expressed as \(\text{Elasticity} = \frac{\% \Delta Q_d}{\% \Delta P}\).
Recall the definitions of different types of price elasticity: Perfectly inelastic means quantity demanded does not change with price (elasticity = 0), relatively inelastic means quantity demanded changes less than proportionally to price changes (elasticity between 0 and 1), unit elastic means quantity demanded changes exactly proportionally to price changes (elasticity = 1), and relatively elastic means quantity demanded changes more than proportionally to price changes (elasticity greater than 1).
Consider the nature of luxury cruises as a good: they are non-essential, often expensive, and have many substitutes or alternatives for consumers, which typically makes demand more sensitive to price changes.
Based on this reasoning, determine that the demand for luxury cruises is likely to be relatively elastic because consumers will reduce quantity demanded significantly if prices rise, reflecting a high responsiveness to price changes.
Conclude that among the given options, 'Relatively elastic' best describes the price elasticity of demand for a luxury cruise.
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