If Good L is a luxury good:
a. demand for Good L will tend to be elastic
b. demand for Good L will tend to be inelastic
c. an increase in the price of Good L will cause a decrease in revenue
d. Both a. and c. above
The correct answer and explanation is:
The correct answer is a. demand for Good L will tend to be elastic.
When a good is classified as a luxury good, it means that it is a non-essential item that consumers buy when they have enough income to afford it, and it provides extra satisfaction or utility. Luxury goods typically have an elastic demand because consumers’ purchasing decisions are sensitive to changes in the price of the good. If the price of the good increases, people may reduce their consumption or forgo the good entirely in favor of alternatives, especially if the good is considered a luxury or a non-essential item.
In economics, the term elasticity of demand refers to the responsiveness of the quantity demanded of a good to a change in its price. For luxury goods, as the price increases, demand decreases significantly. This is because consumers are more likely to be sensitive to price changes when it comes to non-essential or luxury items, as opposed to basic necessities.
Now, considering revenue, if the price of a luxury good increases, the quantity demanded will tend to decrease (due to the elastic nature of the demand). In this case, the total revenue (which is price times quantity sold) could decrease because the reduction in the number of units sold outweighs the increase in the price per unit. This explains why the statement “an increase in the price of Good L will cause a decrease in revenue” is also accurate. This relationship further highlights that the demand for luxury goods tends to be elastic, and price increases do not always lead to increased revenue.
To summarize, luxury goods generally have elastic demand, meaning that as their price increases, the quantity demanded decreases, and total revenue may drop as a result.