Question

Figure 5-5 Price per DVD Supply $16 D(1 = 4,000) D(1 = 3,000) 25 30 35 Quantity of DVDs Refer to Figure 5-5. The data in the diagram indicates that DVDs O are luxury goods. O are both luxury goods and price inelastic goods. O are price inelastic goods. O are both necessities and price inelastic goods. Oare necessities.

Answer 1

When D changes from I=3000 to I=4000, price changes to 16 from 12 and quantity changes to 30 from 25.

Percentage change in price = [(16-12) / 12] * 100 = 33.33%

Percentage change in quantity = [(30-25) / 25] * 100 = 20%

Elasticity of demand = % change in quantity / % change in price

Thus elasticity of demand = 20 / 33.33 = 0.6

Necessary goods and inelastic goods have elasticity less than 1. Thus option D is correct.