Question

In: Economics

If the price elasticity of demand is 1.5 we: A. know it is a normal good....

If the price elasticity of demand is 1.5 we:

A. know it is a normal good.

B. know it is a luxury good.

C. know it is an inferior good.

D. do not know if the good is inferior or normal.

Solutions

Expert Solution

Ans: do not know if the good is inferior or normal.

Explanation:

To know whether a good is normal, inferior or luxury, we have to calculate income elasticity of demand. It can not be determined from price elasticity of demand.

  • If income elasticity of demand is positive and less than 1, then the good is a normal good.
  • If income elasticity of demand is positive and greater than 1, then the good is a luxury good.
  • If income elasticity of demand is negative, then the good is a inferior good.

But , from price elasticity of demand, we can conclude that whether the demand for a good is elastic, inelastic or unitary elastic.

  • If the absolute value of price elasticity of demand is greater than 1, then the demand for the good is elastic.
  • If the absolute value of price elasticity of demand is less than 1, then the demand for the good is inelastic.
  • If the absolute value of price elasticity of demand is equal to 1, then the demand for the good is unitary elastic.

Thus, option [D] is correct answer.

Rahul Sunny answered 3 months ago
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