Suppose the own price elasticity of demand and income elasticity of demand are given by and , respectively. The subscript represents own price of a good and the subscript represents the income of the consumer. Identify the correct statement(s) from the following.
Answer: (C)
(A) is incorrect: (in absolute value) is the definition of price elastic demand, not inelastic — the statement has the classification backwards.
(B) is incorrect: the standard classification is the opposite — luxury goods tend to be more price elastic (since they're discretionary, consumers cut back sharply when prices rise), while necessities tend to be more price inelastic (people keep buying them regardless of price changes).
(C) is correct: luxury goods are precisely defined by having income elasticity — demand for them rises more than proportionally as income rises, which is the standard textbook definition distinguishing luxuries from necessities () and inferior goods ().
(D) is incorrect: is the definition of price inelastic demand, not elastic — again backwards from the correct classification.
Therefore only (C) is correct.
This question is built almost entirely around elastic/inelastic terminology traps — three of the four options simply invert the standard definitions. Students under time pressure who don't carefully check each definition against the vs 1 threshold risk marking one of the inverted statements as true alongside the genuinely correct (C).
Suppose the own price elasticity of demand and income elasticity of demand are given by eₚ and e_I, respectively. The subscript p represents own price of a good and the subscript I represents the income of the consumer. Identify the correct statement(s) from the following. (A) If 1<eₚ<∞, the demand is price inelastic. (B) Luxury goods are more price inelastic and the necessities are price elastic. (C) Luxury goods have e_I>1. (D) If 0<eₚ<1, the demand is price elastic.
Also written as: Suppose the own price elasticity of demand and income elasticity of demand are given by e_p and e_I, respectively. The subscript p represents own price of a good and the subscript I represents the income of the consumer. Identify the correct statement(s) from the following.
Demand theory and elasticity has come up 161 times in 7 exams since 2004.
This question is on Price elasticity of demand, part of Demand theory and elasticity in Microeconomics.
How responsive quantity is to price, at a point, along a linear curve, and for constant-elasticity demand.
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Question from the GATE 2023 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.