Question

Using the four factors that affect the elasticity of demand what degree of elasticity do expect your Good A to exhibit. For each of these factors below identify the degree of elasticity you believe the good will exhibit and how important the factor itself is in determining the overall elasticity of demand. Explain why briefly.

Example. I believe that there are many substitutes for Tropicana OJ in a 12oz. frozen can so the demand will be elastic. This factor has a significant influence on the Ep because customers for OJ I believe react more to relative price changes than the other factors.

Number of substitutes

The % of income spent on the good

The importance of the good itself (is it a necessity, a luxury or neither)?

The timeframe

Good A $6.29	Good A $6.99	Good A $7.69
2	2	1
1	0	0
0	0	0
4	3	2
1	0	0
1	1	0
1	1	0
0	0	0
1	1	0
2	1	0
1	0	0
0	0	0
0	0	0
0	0	0
0	0	0

Answer 1

Greater the substitutes greater the availability. I believe it explains almost 70% of the elasticity

The % of income spent on good. Greater the percentage greater the elasticity. I believe this will explain around 5% of overall elasticity

Importance of good. Necessities are inelastic Luxury goods are elastic It explains 10% according to my view

Time frame. Greater the time frame greater the elasticity. I think it explains 15%

I believe the demand for good is elastic since as price changes changes from 6.29 to 6.99 (=6.99-6.29/6.29(100)=11.12%) demand changes from 4 to 3 or 25%. Elasticity here is around 2. 24(25%/11.12%)