Jenna runs a small boutique in Capitola. She tells one of her suppliers that she is...

Jenna runs a small boutique in Capitola. She tells one of her suppliers that she is willing to pay $6 for a pair of wool hand warmers and not a dime more. On the basis of this information, what can you conclude about her price elasticity of demand for wool hand warmers?

Group of answer choices

It is somewhat elastic.

It is perfectly elastic.

It is perfectly inelastic.

The price elasticity coefficient is 0.

Expert Solution

Correct answer is price elasticity for demand is perfectly elastic because Capitola is only willing to pay $6 for a pair of wool hand warmers which imply any small increase in the price for a pair of wool hand warmers will reduce demand for the same to 0. Demand curve for Capitola horizontal at price $6 and infinite quantity can be demanded at this price but a small increase in the price will reduce demand for wool hand warmers to 0.

First option i.e. price elasticity for demand is somewhat elastic is incorrect because Capitola willingness to pay is $6 and any small increase in price will directly reduce demand to 0.

Third option i.e. price elasticity for demand is perfectly inelastic is incorrect. A perfectly inelastic demand occurs when quantity demanded is not changing with change in price. But in this case price doesnot change for Capitola and quantity demanded for wool hand warmers is not fixed so this option is incorrect.

Last option i.e. the price elasticity coefficient is 0 is wrong because the price elasticity coefficient is 0 when price elasticity for demand is perfectly inelastic.

Rahul Sunny answered 1 year ago

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