Comprehension
Read the given passage and answer the following question:

The demand for bananas is not very responsive to a change in price of bananas. When the percentage change in quantity demanded is less than the percentage change in market price, \( e_D = 0.5 \) is estimated to be less than one and the demand for the good is said to be inelastic at that price. Demand for essential goods is often found to be inelastic.

When the percentage change in quantity demanded is more than the percentage change in market price, the demand is said to be highly responsive to changes in market price and the estimated \( e_D > 1 \). The demand for the good is said to be elastic at that price. Demand for luxury goods is seen to be highly responsive to changes in their market prices and \( e_D > 1 \).

When the percentage change in quantity demanded equals the percentage change in its market price, \( e_D = 1 \) is estimated to be equal to one and the demand for the good is said to be unitary-elastic at that price. Note that the demand for certain goods may be elastic, unitary elastic, and inelastic at different prices. In fact, in the next section, elasticity along a linear demand curve is estimated at different prices and shown to vary at each point on a downward-sloping demand curve.
Question: 1

When is the demand for a good said to be inelastic?

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Remember, if the price elasticity of demand (\(e_p\)) is less than 1, the demand is inelastic, meaning it is not very responsive to price changes.
Updated On: Apr 2, 2026
  • When the percentage change in quantity demanded is greater than the percentage change in market price
  • When the percentage change in quantity demanded is equal to the percentage change in market price
  • When the percentage change in quantity demanded is less than the percentage change in market price
  • When the good is a luxury item
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The Correct Option is C

Solution and Explanation

The price elasticity of demand quantifies the responsiveness of the quantity demanded of a good to alterations in its price.
Demand is considered inelastic when the percentage change in quantity demanded is smaller than the percentage change in market price. This implies that consumers do not substantially decrease the quantity they demand when prices rise.
For a good to exhibit inelastic demand, its price elasticity of demand (\(e_p\)) must be less than 1. This signifies that the quantity demanded does not fluctuate proportionally to the same extent as the price change.
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Question: 2

The demand for luxury goods is generally:

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Luxury goods generally exhibit elastic demand because consumers are more sensitive to price changes. A price increase often leads to a significant decrease in quantity demanded.
Updated On: Apr 2, 2026
  • Inelastic
  • Unitary-elastic
  • Elastic
  • Perfectly elastic
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The Correct Option is C

Solution and Explanation

Luxury goods exhibit elastic demand, signifying a substantial sensitivity of their quantity demanded to price fluctuations. This is attributable to the propensity of luxury item consumers to alter their purchasing habits in response to price shifts. Even a modest price elevation can precipitate a significant decrease in the quantity demanded for luxury products. Conversely, necessities and essential commodities generally display inelastic demand, as consumers are disinclined to curtail their consumption despite price increases.
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Question: 3

If the price elasticity of demand (\(e_d\)) is estimated to be 0.5, the demand for the good is:

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For inelastic demand, \( e_d \) is always less than 1. This means the good's quantity demanded does not change significantly with price changes.
Updated On: Apr 2, 2026
  • Elastic
  • Inelastic
  • Unitary-elastic
  • Perfectly elastic
Show Solution

The Correct Option is B

Solution and Explanation

Price elasticity of demand, denoted as \(e_d\), measures the responsiveness of the quantity demanded to alterations in price.
A value of \(e_d = 0.5\) signifies inelastic demand. This means that the percentage change in quantity demanded is smaller than the percentage change in price.
Consequently, consumers exhibit limited sensitivity to price fluctuations; a change in price does not lead to a proportionally equivalent change in the quantity demanded.
Demand is classified as inelastic when \(e_d<1\). Since \(e_d = 0.5\), this confirms the demand is indeed inelastic.
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Question: 4

Which of the following goods are likely to have inelastic demand?

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Essential goods are usually inelastic, meaning people buy them even if prices increase because they are necessary for daily life.
Updated On: Apr 2, 2026
  • Luxury goods
  • Essential goods
  • Durable goods
  • Non-essential goods
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The Correct Option is B

Solution and Explanation

Inelastic demand describes products where the quantity consumers want to buy changes little when prices fluctuate. Essential items, like necessities, are usually inelastic because people need them regardless of cost; demand remains relatively stable even with price hikes. Conversely, luxury items typically exhibit elastic demand, as consumers can choose to stop purchasing them if prices increase. The elasticity of durable goods varies based on their essentiality, while non-essential items generally have elastic demand.
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Question: 5

What does it indicate if the elasticity of demand (\(e_D\)) is equal to one?

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Unitary-elastic demand means that the percentage change in quantity demanded is equal to the percentage change in price. This leads to no change in total revenue.
Updated On: Apr 2, 2026
  • Perfectly inelastic demand
  • Unitary-elastic demand
  • Perfectly elastic demand
  • Inelastic demand
Show Solution

The Correct Option is B

Solution and Explanation

Unitary-elastic demand, where the price elasticity of demand (\(e_D\)) equals one, signifies that a percentage change in quantity demanded precisely matches the percentage change in price.
This implies a 1% price fluctuation leads to a 1% change in quantity demanded, moving in the inverse direction, thus preserving total revenue.
Conversely, perfectly inelastic demand (\(e_D = 0\)) shows no quantity demanded change irrespective of price. Perfectly elastic demand (\(e_D = \infty\)) means quantity demanded shifts infinitely with any price alteration.
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