- CFA Exams
- CFA Level I Exam
- Study Session 4. Economics (1)
- Reading 12. Topics in Demand and Supply Analysis
- Subject 2. Elasticities of Demand
CFA Practice Question
Studies indicate that the demand for fresh tomatoes is much more elastic than the demand for salt. These findings reflect that ______
A. it takes longer for consumers to adjust to a change in the price of salt than to a change in the price of tomatoes.
B. more good substitutes exist for fresh tomatoes than for salt.
C. tomatoes are a necessity while salt is a luxury.
Explanation: The presence of substitutes for a good raises the elasticity of the good. This is because under a price increase for tomatoes, consumers will switch to other vegetables that are now relatively lower priced. There are few good substitutes for salt and therefore the price elasticity of salt is much lower than that of tomatoes.
User Contributed Comments 3
| User | Comment |
|---|---|
| sheenalim | I had to choose between B and C. why is the answer not B? |
| SeanWilliams1 | There are 3 things that help determine the elasticity of demand: (1) substitutes, (2) Income spent on a good, and (3) Time elapsed since a price change. The answer (it takes longer ...) explains why Salt is elastic - it can be stored for long periods so consumers will adjust their behavior in the long run if the price increases - but it does not explain why the demand for tomatoes is MORE elastic than the demand for salt. The demand for tomatoes is more elastic than salt because tomatoes have more subsitutes. |
| Yurik74 | Great explanation!!! Thanks, SeanWilliams1!!! |