Demand analysis for a consumer product reveals that own price elasticity is -0.37, and income elasticity is 1.2. Provide an economic description of the product

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BlackTom AI · Accepted Answer

To analyze the demand data, we look at two key elasticities:
- Own price elasticity of -0.37 means demand changes by 0.37% for every 1% change in price. Since the absolute value is less than 1, demand is inelastic with respect to price; buyers are not highly responsive to price changes.
- Income elasticity of 1.2 indicates that demand rises as income rises and, crucially, the positive sign and magnitude (>1) suggest the good behaves like a luxury good: demand grows more than proportionally with income.

Now evaluate each option:
Option 1: This is a luxury product which is not very sensitive to change in prices.
- This correctly combines two features: the positive income elasticity (1.2) pointing to luxury status, and the inelastic price sensitivity (|elasticity| = 0.37 < 1) indicating the product is not very sensitive to price changes. This aligns with the given data.
Option 2: This is an inferior product and not sensitive to change in prices.
- An inferior product would have a negative income elasticity, meaning demand decreases as income rises. Here income elasticity is positive (1.2), so this statement is incorrect. Also it could be price-insensitive, but the inferior claim is inconsistent with the data.
Option 3: This product is very sensitive to changes in competitors' prices.
- The provided elasticities describe own price responsiveness and income responsiveness, not cross-price (competitors’ price) effects. Saying it is very sensitive to competitors’ prices would require a cross-price elasticity figure, which we don’t have. This option misconstrues the given information.
Option 4: This is a normal product which is not very sensitive to change in prices.
- While the product is indeed a normal good (positive income elasticity), the magnitude 1.2 indicates it is a luxury good, not just a normal one. The statement understates the income effect by not capturing the luxury aspect, making it incomplete or inaccurate relative to the data.

In summary, the combination of a positive, >1 income elasticity and a low, inelastic own price elasticity points to a luxury good that does not respond strongly to price changes. The remaining options either misstate income effects, misinterpret price sensitivity, or ignore the luxury characteristic.

Demand analysis for a consumer product reveals that own price elasticity is -0.37, and income elasticity is 1.2. Provide an economic description of the product

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