For each pair of items below determine which product would have the higher price elasticity of demand (in absolute value)

a. Blood pressure medicine for someone who has high blood pressure or the purchase of Clairol hair coloring product.
b. A new Ford Fusion or a tank of gas for your current car.
c. A Seiko watch or watches in general.

What will be an ideal response?


a. The demand for the hair product is more price elastic (its elasticity has a higher absolute value) than the demand for blood pressure medicine. The latter is more necessity than luxury and has virtually no substitutes. There are substitutes for the Clairol hair coloring product and it is not a necessity.
b. The demand for a new car is more price elastic than the demand for a tank of gas for your current car. The Ford Fusion: (a) has many substitutes, including your current car and (b) will consume a relatively large portion of your budget. Gasoline for the car you own is more necessity than luxury.
c. The demand for Seiko watches is more price elastic than demand for watches in general. Narrowly defined markets (such as the Seiko watch market) have many substitutes.

Economics

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