Among the following pairs, which is likely to have the greatest price elasticity of demand? Why?
a. cars or Toyotas
b. electricity usage during a month or during a year
c. cable television or an apartment rental
a. The price elasticity of demand is likely greater for Toyotas. The more and better the available substitutes, the greater is the price elasticity of demand. There are many more close substitutes for Toyotas than there are close substitutes for cars in the marketplace.
b. The price elasticity of demand is likely greater for electricity usage over a one-year period than it is over one month's time. Over time, consumers are better able to adjust their habits and thus their energy usage.
c. The price elasticity of demand is higher for an apartment rental than for cable television because rent on an apartment comprises a much greater share of a consumer's budget.
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