ExpertMedium2 marksMultiple Choice
Syllabus A: The business organisation and its external environmentSyllabus AMicroeconomicsElasticity
ACCA · Question 03 · Syllabus A: The business organisation and its external environment
Section A
Verdant Retreats operates ultra-luxury eco-lodges in remote rainforests. They recently increased their booking prices by 15%, which resulted in only a 2% drop in booking volume. What does this indicate about the price elasticity of demand for Verdant Retreats' services?
Section A
Verdant Retreats operates ultra-luxury eco-lodges in remote rainforests. They recently increased their booking prices by 15%, which resulted in only a 2% drop in booking volume. What does this indicate about the price elasticity of demand for Verdant Retreats' services?
Answer options:
A.
Demand is perfectly elastic.
B.
Demand is highly elastic.
C.
Demand is unit elastic.
D.
Demand is highly inelastic.
How to approach this question
Compare the percentage change in quantity demanded (2%) to the percentage change in price (15%). Since 2% < 15%, demand is inelastic.
Full Answer
D.Demand is highly inelastic.✓ Correct
Price elasticity of demand measures responsiveness of quantity demanded to a change in price. Because the percentage change in quantity demanded (2%) is much less than the percentage change in price (15%), the demand is inelastic. Luxury, unique goods often exhibit inelastic demand.
Common mistakes
Reversing the definitions of elastic and inelastic.
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