Question : Statement 1: If a good is a luxury, its demand is generally elastic.
Statement 2: Luxury goods tend to have more substitutes, making consumers more responsive to changes in price.
Option 1: Both statements are true.
Option 2: Both statements are false.
Option 3: Statement 1 is true, and statement 2 is false.
Option 4: Statement 1 is false, and statement 2 is true.
Correct Answer: Both statements are true.
Solution : The correct answer is (A) Both statements are true.
Statement 1: If a good is a luxury, its demand is generally elastic. This statement is true. Luxury goods are often associated with higher income levels and are considered non-essential or discretionary purchases. As a result, consumers are more sensitive to changes in the price of luxury goods, and the demand for luxury goods tends to be more elastic.
Statement 2: Luxury goods tend to have more substitutes, making consumers more responsive to changes in price. This statement is also true. Luxury goods often have a variety of substitute products available in the market. When the price of a luxury good increases, consumers have more options to switch to alternative products, which increases their responsiveness to price changes. This higher availability of substitutes contributes to a more elastic demand for luxury goods.
Both statements accurately describe the relationship between luxury goods, price responsiveness, and elasticity of demand.
