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    Question

    Suppose incomes double over a period of years. Which sorts of product will experience the biggest increases in price?

    A Those with a PES close to 0.0 and an IED well above 0.0. Correct Answer Incorrect Answer
    B Those with a PES close to 0.0 and an IED well below 0.0 Correct Answer Incorrect Answer
    C Those with a PES well above 1.0 and an IED well above 0.0 Correct Answer Incorrect Answer
    D Those with a PES well above 1.0 and an IED well below 0.0 Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    The effect on price depends in part on how much demand increases: the further the IED is above 0.0, the more demand will increase. The effect on price also depends on the PES. The more inelastic is the supply, that is the closer the PES is to 0.0, the more the effect will be. So the combination in a is the correct one.

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