Which of the following characteristics would indicate that an item sold would have a high price elasticity of demand?
A. The cost of the item is low compared to the total budget of the purchasers.
B. The item is considered a necessity.
C. The item has many similar substitutes.
D. Changes in the price of the item are regulated by governmental agency.
Answer:C
The requirement is to identify the characteristic that would indicate that an item has a high price elasticity of demand. C is corrent because if an item has many substitutes, a small price increase would result in a large decrease in demand as consumers choose lower-cost substitutes.
A is incorrect because when the cost of an item is low compared to the total budget of the purchasers an increase in price would result in a small decrease in demand.
B is incorrect because if the item is considered a necessity, price has a smaller effect on demand.
D is incorrect because the fact that the price is regulated would indicate that the product is a necessity with few suppliers.