Math

Question2 The demand for a luxury good whose purchase would exhaust a significant portion of one's income is: Multiple Choice perfectly elastic relatively inelastic О perfectly inelastic О relatively elastic

Studdy Solution

STEP 1

What is this asking? If something *really* expensive gets a little bit more expensive, do people still buy it? Watch out! Don't mix up elastic and inelastic!
Elastic means stretchy/changeable, inelastic means not stretchy/doesn't change much.

STEP 2

1. Define Elasticity
2. Luxury Goods and Income
3. Connect the Dots

STEP 3

**Price elasticity of demand** tells us how much the quantity demanded of something changes when its price changes.
Imagine if the price of bubble gum goes up, you might buy a little less.
That's **elasticity** in action!

STEP 4

If a small price change makes a *big* change in how much people buy, we call that **relatively elastic**.
Think of something like a fancy vacation – if the price jumps up, you might decide to stay home!

STEP 5

If a price change *doesn't* change how much people buy very much, we call that **relatively inelastic**.
Think of things you *really* need, like gas for your car.
Even if the price goes up, you probably still need to buy roughly the same amount.

STEP 6

**Luxury goods**, by definition, are things you buy *after* you've covered your necessities.
Think sports cars, designer handbags, or diamond-encrusted dog collars (if you're into that sort of thing!).

STEP 7

Because these goods take up a big chunk of someone's income, people are *much* more sensitive to price changes.
If the price of a luxury yacht goes up even a little, some potential buyers might suddenly decide they're perfectly happy with their regular boat.

STEP 8

We know that luxury goods represent a significant portion of one's income.

STEP 9

We also know that when a price changes for these goods, people are likely to change their buying habits quite a bit.

STEP 10

That means the demand for luxury goods is **relatively elastic**!

STEP 11

Relatively elastic is the correct answer.

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