Question

Suppose that Jane enjoys Diet Coke so much that she consumes one can every day. Although she enjoys gourmet cheese, she consumes it sporadically. If the price of Diet Coke rises, Jane decreases her consumption by only a very small amount. But if the price of gourmet cheese rises, Jane decreases her consumption by a lot. These examples illustrate the importance of the availability of close substitutes in determining the price elasticity of demand.the time horizon in determining the price elasticity of demand.a necessity versus a luxury in determining the price elasticity of demand.the definition of a market in determining the price elasticity of demand.

Answer 1

Answer:

The answer is: necessity versus a luxury in determining the price elasticity of demand

Explanation:

The price elasticity of demand measures the change in the quantity demanded of a product in relation to a change in its price.

The formula for determining the price elasticity of demand (PED) is:

PED = % of the change in Quantity Demanded / % of the change in price

Usually goods or services considered luxurious (e.g. gourmet cheese), tend to be very elastic (high PED). While products considered basic necessities (e.g. gasoline, or Diet Coke in Jane´s case) tend to be very inelastic (low PED).

For example, if the price of gourmet cheese (luxury product) rises 10% and the quantity demanded drops 25%, we can say gourmet cheese is a very elastic product (PED = 2.5)

Instead, if the price of gasoline rises 10% and the quantity demanded only drops 1%, we can say gasoline is very inelastic (PED = 0.1).