Question

Suppose that Jane enjoys Diet Coke so much that she consumes one can every day. Although she enjoys gourmet cheese, she consumes it sporadically. If the price of Diet Coke rises, Jane decreases her consumption by only a very small amount. But if the price of gourmet cheese rises, Jane decreases her consumption by a lot. These examples illustrate the importance of a. the availability of close substitutes in determining the price elasticity of demand. b. a necessity versus a luxury in determining the price elasticity of demand. c. the definition of a market in determining the price elasticity of demand. d. the time horizon in determining the price elasticity of demand.

Answer 1

The correct answer is option b.

Step-by-step explanation:

Jane enjoys Diet Coke so much that she consumes one can every day.

She likes gourmet cheese as well but she consumes it sometimes.

If the price of Diet Coke rises, Jane decreases her consumption by only a very small amount.

But if the price of gourmet cheese rises, Jane decreases her consumption by a lot.

This is because, for Jane, diet coke is a necessity but cheese is a luxury good. So, when price increases the demand for diet coke will decrease by a little amount and demand for cheese will decrease by a great amount.