Which of the following goods or services have the smaller absolute value price elasticity of demand?
a. ExxonMobil gasoline: gasoline in general
b. Beauticians’ services; plumbers’ services
c. Automobiles; color photocopies
d. Coach-class airfare; business-class airfare
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Answer:
a) gas in general... there are many substitutes for exxonmobil gas, not as many for gas in general
b) plumbers service... people don't need beauty services as much as they need a working toilet
c) automobiles... autos seem more a necessity than color photocopies. color photocopies also have the substitute of b&w copies
d) coach class... an increase in the price of business class will drive people to fly coach more quickly than an increase in the price of coach seat would drive them to not fly period
The phrase "smaller absolute value of price elasticity of demand" means that quantity demanded is less sensitive to a price increase.
(a). The quantity of a particular brand of gasoline demanded is more sensitive to a price increase than is the quantity of gasoline demanded in general, since people need to buy gasoline but different brands are close substitutes for one another. In general, the demand for a good is more elastic the more readily available are substitutes for that good.
(b) Most people are presumably better able to substitute their own services for beauticain's services than they are to substitute their own services for a plumber's services.
(c) An automobile comprises a very large share of the typical consumer's budget. On the other hand, color photo-copies typically comprise a very small share in a consumer's budget. In general, the quantity of a good demanded is more sensitive to a price increase the larger the share that that good comprises in his or her budget.
(d) The quantity of a good demanded by richer people tends to be less sensitive to a price increase than does the quantity of a similar good demanded by those who are less able to pay.
(b)
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