CFA Practice Question

There are 539 practice questions for this study session.

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!!!
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