Price Elasticity of Demand Determinants

Steps:

• Recall that price elasticity measures responsiveness of quantity demanded to price changes; elastic demand (>1) occurs with easy alternatives or high budget impact.
• Identify key factors: many close substitutes make switching easy, increasing elasticity; large income share amplifies price sensitivity.
• Evaluate choices: A combines both factors for maximum elasticity; B has substitutes but low income impact, reducing overall elasticity; C lacks substitutes despite high income share; D has neither.
• Conclude A yields highest elasticity.

Why A is correct:

• Law of demand states elasticity rises with abundant substitutes (consumers switch easily) and high income proportion (price hikes strain budgets more), per elasticity formula |%ΔQd / %ΔP| >1.

Why the others are wrong:

• B: Substitutes promote elasticity, but small income share limits sensitivity, leading to inelastic demand.
• C: Large income share increases sensitivity, but few substitutes trap consumers, causing inelasticity.
• D: Both factors (few substitutes, small income share) result in highly inelastic demand.

Final answer: A