What factors determine the size of the price elasticity of demand?
What will be an ideal response?
The factors that determine the size of the elasticity of demand can be classified into the availability of substitutes for the good and the proportion of income spent on the good. The more substitutes for a good, the more elastic its demand. Luxuries have more substitutes than necessities, and so the elasticity of demand for luxuries exceeds that for necessities; narrowly defined goods have more substitutes than broadly defined goods, and so the elasticity of demand for narrowly defined goods exceeds that for broadly defined goods; and, the more time that has elapsed since a price change, the more substitutes consumers can find, and so the elasticity of demand is larger the more time passes. Income also plays a role because the larger the proportion of consumers' incomes spent on a good, the larger is its elasticity of demand.
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The statement, "John buys more of good X as his income increases, Ceteris paribus," means:
a. John's income is being held constant. b. John's purchases of good X are being held constant. c. John's income and purchases of this good are being held constant. d. the price of this good is being allowed to change.
Which of the following practices of insurers deter moral hazard?
a. Setting a uniform premium structure. b. Requiring people to purchase the same coverage. c. Arranging for reinsurance to cut the risk of unexpectedly large claims. d. Conducting security checks without notice and terminating the policy whenever required.