There are many different factors that impact the price elasticity of demand. More specifically, the proportion of budget and the income effect refer to how price as a portion of income influences price elasticity. Which of the following is true

Question

BlackTom AI · Accepted Answer

The question asks about how the income effect and the proportion of budget relate to price elasticity of demand when price changes.
Option 1: 'Income effect says higher relative price increases elasticity; proportion of budget says higher relative price decreases elasticity' This says the income effect would make elasticity rise with a higher price, but then claims the budget share would cause elasticity to fall as price rises. The two effects are typically aligned in suggesting that a larger price relative to income (either via income effect or budget share) tends to make demand more elastic, not less, so mixing one increasing and the other decreasing is inconsistent with standard intuition.
Option 2: 'Both say higher relative price increases elasticity' Here, both the income effect and the proportion of budget are commonly viewed as making elasticity larger when the price becomes a bigger share of income. When a price hike consumes a larger portion of income, consumers feel the hit more and adjust quantity more; similarly, goods that take up a larger budget share tend to have more elastic responses because small price changes lead to larger proportional budget effects and clearer substitution possibilities. This option matches the typical interpretation that higher relative price amplifies responsiveness in both channels.
Option 3: 'Income effect says higher relative price decreases elasticity; proportion of budget says higher relative price increases elasticity' This splits the direction of the income effect, asserting that income effect would dampen responsiveness as price rises, which goes against the common view that a larger income effect (from a price increase that reduces real income) tends to heighten sensitivity to price or at least reflect a stronger overall reaction. The mismatch makes this option inconsistent.
Option 4: 'Both say higher relative price decreases elasticity' This would imply that as price becomes a larger portion of income, demand becomes less responsive, which contradicts the intuitive and standard notion that higher price burdens lead to stronger quantity adjustments and higher elasticity, particularly through the budget share channel and the income effect.
In summary, the reasoning for each choice hinges on whether a larger price relative to income makes demand more or less responsive. The prevailing interpretation is that both the income effect and the budget proportion contribute to greater elasticity when price is a larger share of income, making Option 2 the coherent choice among the four presented.

COMM_V 296 103 104 2025W1 2025W1 COMM 296 Final Exam - December 15- Requires Respondus LockDown Browser

There are many different factors that impact the price elasticity of demand. More specifically, the proportion of budget and the income effect refer to how price as a portion of income influences price elasticity. Which of the following is true

查看解析

登录即可查看完整答案

类似问题

When there are many substitute products available, the price elasticity of demand for a given product will likely be Blank ______.

When a 10 percent decrease in price results in a less than 10 percent increase in quantity sold, the demand for the product or service is described as Blank ______.

If the absolute value of the price elasticity of demand for good X is 0.5, then a 10% decrease in the price of good X will result in which of the following?

The own-price elasticity of Starbucks coffee is -0.8, meaning __.

Rock melon has a price of elasticity of demand of (-)2.95, it can be concluded that the demand for rock melons is ___________.

The discovery of a new hybrid wheat would tend to increase the supply of wheat. Under what conditions would wheat farmers realise an increase in revenue?

Shoes are priced at $75 per pair. A vendor sells 20 pairs per day. The vendor explores selling at $100 per pair. At that price, the vendor sells 15 pairs over the day. What is the elasticity of shoe sales to price.

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

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单