Question

In the table below you can see the estimates of the price elasticities of different food products in the country X.

                                                                                 Price elasticity                               

                           Food products                                                         -0,36                                            

                           Meat                                                                        -0,80                                            

                           Fish                                                                          -0,81                                           

                           Bread                                                                      -0,77                                            

                           Fruits and vegetables                                            -0,96                                            

                           Coffee, tee, cacao                                                 -0,42                                          

                           Eggs, milk, cheese                                          -0,47                                         

                           Soft drinks                                                              -0,85                                          

                           Restaurant services                                              -0,84                                          

                           Alcohol                                                                  -0,59                                         

Which of the following statements are true?

Select one or more:

a. An increase in the price of alcohol would reduce alcohol consumption but would increase the amount of money spent on alcohol in the country.

b. A 10% decrease in prices would increase the prices of vegetables and fruits in demand the most from the listed products.

c. Demand for food is quite inelastic, as there are no good substitutes for food.

d. Demand for vegetables and fruits is flexible, and therefore an increase in their price increases the amount of money spent on them.

e. Rising food prices reduce the amount of food demanded but increase the amount of money spent on them.

Answer 1

Price elasticity is the relative change in demand for a product with change in its price.

Price elasticity is always indicated with a negative sign showing inverse relationship or opposite direction between price and its quantity demanded.

Price elasticity of demand can be divided into:

Perfectly Elastic Demand ( value = ∞),

Perfectly Inelastic Demand ( 0 ), Relatively Elastic Demand (> 1), Relatively Inelastic Demand (< 1), Unitary Elasticity Demand (= 1).

( a ). True

Price elasticity for alcohol is ( - 0.59 ) which shows that the demand for alcohol is relatively inelastic. Therefore, price change in alcohol will have negligible effect on its demand. However, as its price has increased its demand will more or less remain the same ( as its demand is relatively inelastic ). Thus, we can say that increase in price will lead to increased spending on alcohol in the country.

( b ). True

The elasticity of demand for fruits and vegetables is highest ( - 0.96 ). Therefore, a 10% change in price will have largest impact on demand amongst the given items above.

( c ). True

The price elasticity of demand for food is least ( - 0.36 ). Therefore, any change in price would have least impact on its demand.

( d ). False

As the demand for fruits and vegetables is most flexible, people can easily substitute other items with increase in price of fruits and vegetables.

( e ). False

Even with rising food prices, the demand will relatively remain unchanged as price easticity of demand is inelastic.