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cbbgptch
May 11, 2015, 12:58 PM
I am working on a practice test for a final in economics. I heard from a fellow student the supposed answer to the question below. However, their answer doesn't seem to make sense (based on my limited knowledge of economics. Can you help?

For a particular good, a 3% increase in price causes a 10% decrease in quantity demanded. Which of the following is most likely applicable to this good?
A-The relative time horizon is short
B-The good is a necessity (his answer)
C-The market for the good is broadly defined
D-There are many close substitutes for this good (my answer)

It seems to me that such a large shift in quantity demanded in response to such a small change in price is indicative of an ELASTIC good, and that necessity goods are very INELASTIC, making B wrong (the 3% change in price would result in a low percentage change in quantity demanded). D seems right because, if there were close substitutes, the good would be very elastic because changes in price, even small, would result in significant shifts in demand (because the consumers could make an easy shift).

Is my thinking correct or am I way off base? Please help. Thank you

paraclete
May 20, 2015, 06:36 PM
I think the answer is D. B is not the answer because a necessity would mean that demand would remain even after a price shift.