A luxury handbag brand raises prices by 10% but experiences only a 2% drop in volume. Demand is:

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BlackTom AI · Accepted Answer

The question asks about the elasticity of demand given a price increase of 10% and a volume drop of 2%. We will evaluate each answer choice in turn.
Option 1: 'Growing' — This term would imply that demand increases as price rises, which is inconsistent with the observed data (price up, volume down). The observed movement does not support growth in demand, so this option is incorrect.
Option 2: 'Fixed' — A fixed demand would mean no change in quantity demanded when price changes; however, the scenario shows a 2% decrease in volume after a 10% price increase, so demand is not fixed. This option mischaracterizes the responsiveness of quantity to price.
Option 3: 'Inelastic' — This option aligns with the idea that quantity demanded changes only slightly when price changes. To quantify, elasticity of demand is the percentage change in quantity divided by the percentage change in price: |ΔQ/Q| / |ΔP/P| = 2% / 10% = 0.2. Since 0.2 is less than 1 in absolute value, demand is considered inelastic. This matches the observed small drop in quantity despite a substantial price increase.
Option 4: 'Elastic' — Elastic demand would require a relatively large change in quantity with a price change; with only a 2% drop in volume after a 10% price rise, the responsiveness is not large enough to be elastic. Therefore this option is incorrect.
Option 5: 'Declining' — While the quantity did decline (2%), the term 'declining' describes the direction of quantity only and does not address the price sensitivity. Elasticity focuses on the magnitude of response, so calling it simply 'Declining' ignores the key concept of price responsiveness and is not the best descriptor in this context.
Overall, the data show a small quantity response to a price increase, yielding a low elasticity value (0.2 in absolute terms), which corresponds to the inelastic characterization. The option that matches this interpretation is the one labeled 'Inelastic'.

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A luxury handbag brand raises prices by 10% but experiences only a 2% drop in volume. Demand is:

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