CFA Practice Question

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CFA Practice Question

For which of the following goods is the demand curve likely to be most elastic?

A. Health care
B. Cigarettes
C. A holiday trip to the Bahamas
Correct Answer: C

Necessities such as salt and health care have few alternatives. So, their demand curves are likely to be relatively inelastic. Cigarettes have few alternatives and, because of their addictive nature, the demand curve would be relatively inelastic. But there are sufficient alternatives to taking a luxurious holiday trip to the Bahamas (taking a trip to another destination, for example).

User Contributed Comments 4

User Comment
Rotigga Cigarettes are indeed inelastic; especially when you have a full time job at an investment bank AND you're studying for the CFA during nights and weekends!
studyprep I think two conditions for the in-elasticity
1: few alternative + 2: easily available
(e.g. although sometimes things have few alternatives but still because they are scarce they don't stay that much inelastic)
sharky7 don't agree with this answer...
I think if u have enough money to pay for a trip to bahamas you don't care about paying 10% more or less, however if the price of cigarettes rises 10% I would like to see what happens!
Huricane74 @sharky7:
A trip to the Bahamas is elastic.

If the price of a trip to the Bahamas goes up, then a person can go on vacation to Mexico, South America or Greece. Going to the beach or the movies is another option if a trip altogether becomes too expensive.

How much a person makes is irrelevant.
The relevant factor for determining whether or not a product is elastic if there are substitutes /alternatives.
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