Question

Below, you are provided with four groups of different goods. These goods are differentiated by the number of likely substitutes that each has, and by the fraction of income that consumers spend on each. You will rank the goods within each group by their expected price elasticities of demand.
Consider the following three goods:
1. a red convertible car
2. a car
3. a convertible car.

Rank the demand of these three goods by their expected price elasticities of demand from most elastic to least elastic.

Answer 1

Answer and Explanation:

The red and the convertible cars would be considered similar i.e. they are perfect substitutes also the car and the convertible car would be the substitutes but it is not a perfect as the convertible car would be the subset of the car group plus the expenditure made on the convertible car would be high so here the elasticity is more