Question

Explain whether demand is likely to be elastic or inelastic for Big Macs. A. Elastic comma since many other fast food items could be considered close substitutes. B. Inelastic due to a lack of close substitutes. C. Elastic due to a lack of close substitutes. D. Inelastic comma since other fast food items could be considered close substitutes.

Answer 1

Answer:

A - elastic since many other fast food items could be considered close substitutes.

Explanation:

The price elasticity of demand is how much the demand of the Big Macs will change due to a 1% change in price. Should the elasticity be greater than 1, the Big Macs will be elastic. Should it be less than 1, the Big Macs are inelastic.  

Demand elasticity is calculated as the percentage change in quantity demanded divided by a percentage change in price.

Since Big Macs are (i) a luxury good, and (ii) have close substitutes (other burgers available at McDonalds and other fast food stores), we will say their elasticity is greater than 1.  

This means that the demand of Big Macs will change due to a 1% increase in price due to the presence of close substitutes.