Multiple Choice
Which of the following lists includes key determinants of the price elasticity of demand for a good?
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4. Elasticity
Determinants of Price Elasticity of Demand
Multiple Choice
Which product is most likely to have a low (inelastic) price elasticity of demand?
A
A particular brand of breakfast cereal with many close substitutes
B
International vacation travel
C
Insulin for diabetics
D
Restaurant meals at mid-priced restaurants
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 \(\text{Price Elasticity of Demand} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\).
Identify characteristics of goods with inelastic demand: these goods typically have few or no close substitutes, are necessities, and represent a small portion of the consumer's budget.
Analyze each option: a particular brand of breakfast cereal has many close substitutes, so demand is likely elastic; international vacation travel is a luxury and has substitutes, so demand tends to be elastic; restaurant meals at mid-priced restaurants have substitutes and are somewhat discretionary, so demand is moderately elastic.
Recognize that insulin for diabetics is a life-saving medication with no close substitutes and is a necessity, so its demand is highly inelastic.
Conclude that the product most likely to have low (inelastic) price elasticity of demand is insulin for diabetics because consumers will buy it regardless of price changes due to its essential nature.
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