Question

At higher prices, the price elasticity of demand is likely to be ________, whereas it is likely to be ________ at lower prices.

A. perfectly elastic; perfectly inelastic

B. elastic; inelastic

C. inelastic; elastic

D. perfectly inelastic; perfectly elastic

E. unitary elastic; elastic

E?

Answer 1

At higher prices, the price elasticity of demand is likely to be perfectly elastic, whereas it is likely to be perfectly inelastic at lower prices.

Let's understand why

The elasticity of demand for a good depends on its own price. As price changes, quantity demanded of the good changes, owing to the law of demand. Also, at different prices of the product, i.e., at different points on the demand curve for a good, the coefficient of price-elasticity of demand for the good would be different.

Generally, the smaller the price of a good, the less is the elasticity of its demand. For, when the price is very small, a change in price would have no considerable effect on demand

On the other hand, the larger the price, the more would be the elasticity of demand. For, when the price is relatively large, a further rise in price would have a considerable dampening effect on de­mand and a fall in price would have an encouraging effect on demand.

Now let's understand with the help of diagram

The above graph shows elasticity of demand by geometric method or point method. It can seen from above graph that at higher prices price elasticity of demand is infinity and at lower prices price elasticity of demand is equal to zero.

Hence option A is correct