Anonymous asked in Social ScienceEconomics · 8 years ago

Price inelastic demand?

Peter always spends exactly $20 on pies and sauce. The two are complements for him.

If the price of sauce rises, then :

(a) After the price rise he will spend more money on pies than before.

(b) After the price rise he will spend less money on sauce than before.

(c) Demand for sauce must be price inelastic.

(d) Demand for sauce must be price elastic.

The answer is C. Why??

3 Answers

  • John M
    Lv 7
    8 years ago
    Favorite Answer

    Price elasticity of demand is measured by the % change in quantity/the % change in price. With no change in the price of pie, but an increase in the price of sauce, and the fact that we must spend all $20 and no more, we know that we will be buying less sauce AND less pie. That means that the price change in sauce times the quantity change in sauce will equal the change in the quantity of pie times the price of the pie.

    Imagine we have Pie at $5 each and Sauce at $1 a bottle. We buy 3 pies and 5 sauce for a total of $20. Sauce goes to $2 a bottle. We have to buy less pie and less sauce to stay at $20.

    at first $20 = (5 * 3pies) + (1 * 5sauce)

    So $20 now = 5p+2s

    I have to buy less pie and less sauce, so I can't just cut my sauce consumption to 2.5 bottles and keep my 3 pies. Since I have to buy less pie than I did before, even though its the same price, that means that I'm going to be buying more sauce that I would ordinarily want to buy based on the price change. the fact that I am buying more sauce than I would otherwise buy in response to the price change means my demand is inelastic by virtue of the fact that the sauce is complimentary with pie.

  • 4 years ago

    What the time period means is that for every change in rate, the trade favorite is smaller in share. Analysing the quandary, I believe that a excellent harvest means provide increases, as a consequence prices curb. Technically, this will have to entail higher demand. However, the inelasticity of agricultural goods explanations demand to only expand through a little, gains decline and the sales of farmers suffers as well. Incomes in different sectors must expand since agricultural goods are actually more cost effective.

  • 8 years ago

    Try using elastic money.

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