Question

Compare the demand for water with the demand for wine. The demand for wine is likely A. relatively more elastic because wine is a necessity. B. relatively more inelastic because wine is a necessity. C. equally elastic as the demand for water. D. relatively more inelastic because wine is a luxury. E. relatively more elastic because wine is a luxury.

Answer 1

Answer:

D. relatively more inelastic because wine is a luxury.

Explanation:

Elasticity is a measure of the sensitivity of demand to price changes. When price changes significantly alter demand, we say that demand is elastic. On the contrary, when price changes do not significantly alter demand, we say that demand is inelastic. This is the case of wine in relation to water. Wine is a good that can be considered sophisticated, luxury. Therefore, consumers are less sensitive to variations in the price of wine. However, water is an abundant good and demanded by all. If the price of water increases, demand tends to decrease as the elasticity of water demand is relatively greater than the elasticity of demand for wine. In other words, wine the demand for wine is relatively more inelastic.