Question

2. Characterize the demand for each of the following goods or services as relatively price elastic in demand or relatively price inelastic with respect to demand and explain why: a. A lifesaving medicine b. Photocopies at a copy shop when there are other copy shops near by c. The water you buy from the local utility company d. Flights to Cancun

Answer 1

a) The price elasticity of demand for a lifesaving medicine is relatively inelastic as it is a necessity for someone who needs it. Even if price of the medicine increases, the availability of substitute for a lifesaving medicine is very low and therefore, the change in demand will be small relative to change in price.

b) The elasticity of demand will be relatively elastic because of the availability of perfect substitutes in the form of other copy shops near by

c) The demand will be relatively inelastic because consumers treat water as necessities rather than luxuries but it will be time-sensitive because if local utility company increase price to very high level, then consumers will prefer carrying water with them from home and elasticity may increase as time passes.

d) The price elasticity will be relatively elastic because consumers see flight to Cancun as luxury.

d)