Question

Research has shown that the price elasticity of demand for hospital care is approximately -0.15 while the price elasticity of demand for movie tickets is -3.40. Based on these estimated elasticities, which of the following statements best characterizes hospital care and movie tickets?

A. Hospital care is a necessity and movie tickets are a luxury.

B. Hospital care is sought over a long time-horizon and movie going is a quick decision.

C. Hospital care has many close substitutes and movie going does not.

D. All of the above correctly explain the differences.

Answer 1

Hospital care, with a price elasticity of demand at -0.15, is inelastic and represents a necessity, indicating consumers will still require it even if prices change. Movie tickets have an elasticity of -3.40, showing demand is elastic and sensitive to price changes, suggesting they are a luxury, not a necessity.

Step-by-step explanation:

The price elasticity of demand for a product indicates how much the quantity demanded responds to a change in price. When demand is inelastic (elasticity absolute value less than 1), it suggests that the quantity demanded does not respond significantly to price changes. This is often the case for necessities which do not have close substitutes, such as hospital care with an elasticity of -0.15. Conversely, a good with elastic demand (elasticity absolute value greater than 1), like movie tickets with an elasticity of -3.40, indicates that demand is more sensitive to price changes, which can be characteristic of non-essential or luxury items.

Based on the given elasticities, Option A is correct: Hospital care is a necessity and the demand for it is inelastic, meaning consumers will still require it irrespective of price changes, and movie tickets are a luxury with elastic demand, where demand is significantly affected by price alterations.