Question

Empirical estimates suggest the following price elasticity of demand 0.6 for Coca-Cola,4.0 foreign vacation travel and 0.2 for cigarette.Using the determinants of price elasticity of demand
Explain why each of these commodities would have coefficient elasticity.

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Answer 1

For coca cola Ed is 0.6 which means that the demand is inelastic in nature. Hence this means that even if the price changes by considerable amount , the quantity demanded does not change much. This may be as a result of habit to consume coca cola .

The foreign vacation is elastic in nature which means that , when the price of vacations rise , or fall , the demand changes by much greater amount (4 times ) as compared to change in price.

For cigarettes , demand is very inelastic , because Ed is 0.2. This means that the change in price , nearly has no effect upon the demand for cigarettes. This may be because of the addiction to cigarettes.