Question

Suppose the own price elasticity of demand and income elasticity of demand are $e_p$ and $e_I$, respectively. Identify the correct statement(s).

• A. If $1<e_p<\infty$, the demand is price inelastic.
• B. Luxury goods are more price inelastic and the necessities are price elastic.
• C. Luxury goods have $e_I>1$.
• D. If $0<e_p<1$, the demand is price elastic.

Hint:

Memorize: price—$|e_p|>1$ elastic, $<1$ inelastic; income—necessities $0<e_I<1$, luxuries $e_I>1$, inferior $e_I<0$.

Answer 1

The Correct Option is C

Price elasticity rules: $|e_p|>1 \Rightarrow$ price elastic; $0<|e_p|<1 \Rightarrow$ price inelastic.
Therefore (A) is false (that range is elastic), and (D) is false (that range is inelastic).
Income elasticity: For luxury goods, $e_I>1$ (demand rises more than proportionally with income); necessities have $0<e_I<1$ and are typically price inelastic. Hence (B) is false and (C) is true.
Thus, the correct choice is \fbox{(C)}.