CFA Practice Question

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CFA Practice Question

If you earn \$80,000 a year and acquiring cable TV service costs you \$150 per year, your demand for cable is likely to be ______.

A. inelastic
B. elastic
C. perfectly inelastic

Your demand for cable is likely to be inelastic since it represents a relatively small proportion of your budget. It is not perfectly inelastic, however, since you will not purchase as much cable if the price changes enough.

User Comment
stan68 does it means a little change in the quantity consumption when compared to the price level is equal to the definition of Inelsatic of demand?
cbeliveau Yes; the best way to think of elasticity is sensitivity to price change. Therefore if price changes a lot but your consumption does not then it is inelastic.
Yrazzaq88 I thought it would be B, since I considered the competitors that might be offering lower prices. I know, he's making 80K a year, but even if you're making that much money, sometimes you always want the best deals.
chesschh this would not apply to tight people.
choas69 in the LOS; Factors influence elasticity > propotion of income it stated that the demand will be less elastic but that doesnt mean it will be inelastic, i guess inelastic is the closer term to less elastic.
Huricane74 The key to understanding the correct answer is understand how the behavior of a person that makes a lot of money would change.

For a person that makes \$80,000 per year, a "reasonable" increase in the cost of cable in the amount of 10% to 20% would not significantly alter the behavior / demand for cable. A 10% to 20% increase represents an additional \$180 to \$360 per year. This is not a large percentage of their income. Thus, for these individuals, the demand is inelastic.

However, for a person making 25,000 per year, an increase in the cost of cable in the amount of 10% to 20% (\$15 to \$30) would have a significantly larger affect on the demand for cable by these individuals. They may opt for internet access and netflix, which many people have actually done. Thus, the demand for cable by people in this income bracket elastic.
Anna_u +