2021 · Q32
How is the magnitude of price elasticity for an individual good determined?
- 1By the degree to which the good is a necessity or luxury
- 2By the extent to which substitutes are available
- 3By the rate of income growth in the economy
- 4By the relative importance of the good in the consumer’s budget
Select the correct answer using the code given below.
indian-polity-economyeconomy-fundamentals
- A1, 2 and 3
- B1 and 4 only
- C1, 2 and 4
- D3 and 4
Explanation
The magnitude of price elasticity of demand for a good is determined by how essential versus luxurious it is (statement 1), how many close substitutes are available (statement 2), and how large a share of the consumer's budget it takes (statement 4). The rate of income growth in the economy (statement 3) is not a standard determinant of elasticity. Hence statements 1, 2 and 4 determine it.