Question

Would you expect the demand for coffee to be inelastic? Would you expect the long-run demand elasticity for natural gas to be greater than the short-run elasticity? Would you expect the demand for the foreign luxury cares in the U.S. to be elastic? Why?

Answer 1

(a) Demand for coffee is expected to be inelastic. The lower (higher) the proportion of total budget that is spent for a good, the more inelastic (elastic) the good is. Spending on coffee comprises a small proportion of consumer budget, so demand for coffee is inelastic.

(b) Long run elasticity for natural gas would be higher than its short run elasticity. This is because, the more (less) time that elapses, the more (less) substitutes for a good that are available to consumers and therefore, the more elastic (inelastic) the good is in long run.

(c) Demand for foreign luxury cars is elastic. This is because the demand for a luxury (necessity) good is elastic (inelastic).