Give an example of price elasticity for each of the following factors: 1) the availability of close substitutes and 2) the proportion of income spent on the good. Avoid using examples from the text.
What will be an ideal response?
Examples will vary, but should show a thorough understanding of the factors that affect price elasticity. For example, cookies would have many close substitutes. If a brand of cookie raises its price, the consumer has many other cookies to choose from. As a result, cookies have high elasticity. If a person wants to buy a new garage door and automatic opener, the cost would be around $1,000, which is a sizable chunk of income for many people. Thus, a 20 percent increase in price could prevent a person from buying this product, thereby giving it high elasticity.
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Indicate whether the statement is true or false