For most goods and services, income elasticity of demand tends to be smaller in the short run than in the long run. However, a recent study shows that the demand for a durable good such as automobiles tends to be more income-elastic in the short run than in the long run. Why?

What will be an ideal response?

Answer: Since durable goods are typically consumed over a relatively long period of time, consumers have a higher degree of flexibility to replace old goods with new ones. Demand for automobiles is a good example. Suppose that consumers' income falls due to a recession. Considering that the purchase of an automobile represents a large share of a consumer's budget, the consumer may put off the purchase of a new automobile till next year. In the long run, automobiles will eventually break down and new purchases will be made.