CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

The price elasticity of demand for a product tends to be small (less elastic) when ______
A. people spend a large fraction of their income on the product.
B. the good is broadly defined.
C. there are many good substitutes for the product.
Explanation: When a good is broadly defined, such as "soft drinks," the elasticity of demand is small because all of the good substitutes have been included under the definition of the good. The fewer the substitutes and the smaller the portion of income spent on the good, the less elastic demand is likely to be.

User Contributed Comments 9

User Comment
dimanyc what if a "broadly defined good" is "car models". Don't tell me that if Chrysler raises prices, the demand for its products will be less elastic, when you can go to Ford and buy a comparable (substitute) car for much less.
xiong In your example the case would be when all car models' prices are increased, what would the demand be? Consider them as a group, not individual products.
surob Good question.
octavianus Also, the smaller the portion of income spent on the good will make it more inelastic.

A vehicle purchase is the second largest average expenditure individuals incur after housing and thus demand is quite elastic.
pdubyac Think of "modes of automated transportation" vs. "car models" vs. "American sedans" to see how increasing the breadth of definition leads to decreasing elasticity.

Also--one supplier's move to change price does not change the demand curve. And as a supplier raises prices, you are correct--it reaches the more elastic portion of its demand curve.
bhuman I spent this question contemplating what was meant by broadly defined.
dini85 have close look at the options .. A & C are not true... i have little idea about B, but i went for B.
gill15 I didnt quite understand broadly defined. I thought B and C were the same. If something is broadly defined like soft drinks there are many substitutes and therefor broadly defined would mean it's elastic.

I guess im wrong.
crissb What would happen if a person, for example, is not that well off and therefore has to spend a large proportion of their income on necessities such as food, water bills, gas bills etc. etc. surely then it would be inelastic for said person? So is it a prior assumption that the person in question has a certain level of income and has the ability to spend on luxury items? Just a thought...
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