Answer to Question #146905 in Microeconomics for Ali

Question

In the context of Pakistan’s society for each of the following products, indicate the correct type of price elasticity of demand or supply and also justify your answer:
a) An exquisite painting to be sold at an auction (1 Mark)
b) Demand for Cancer-treating drug (1mark)
c) Production of gold mining (1 mark)
d) Demand for gold (1 mark)

Answer 1

a) $\bold {Answer}$

Supply is inelastic $(\epsilon < 1)$

$\bold {Explanation}$

Exquisite painting requires sophisticated raw materials and special conditions to produce it. It requires special conditions to be met. Therefore, supply is less responsive to a change in price as it takes time to adjust.

b)$\bold {Answer}$

Demand is inelastic $(\eta_d < 1)$

$\bold {Explanation}$

Once a person is on cancer treatment, the cancer-treating drug becomes a necessity. The patient can no longer live without it. Also, the drug has no close substitutes. As a result, demand is less responsive to a price change.

c)$\bold {Answer}$

Supply is inelastic $(\epsilon < 1)$

$\bold {Explanation}$

Production of gold is capital intensive and requires expensive raw materials. It takes time to adjust capacity to respond to a change in demand. Therefore, supply is inelastic.

d) $\bold {Answer}$

Demand is elastic $(\eta_d > 1)$

$\bold {Explanation}$

Gold is a luxury good; one can live without gold. Also, for many products, gold has close substitutes due to advancement in technology. Thus, when price of gold increases, quantity demanded responds by more than proportionate.