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    Question

    Which of the following statements regarding the

    elasticity of demand is/are correct? 1. The sign of the price elasticity of demand cannot be positive. 2. For normal goods the income elasticity of demand is always positive but usually less than 1. 3. The price elasticity of demand is defined to be the percent change in quantity divided by the percent change in demand. Select the correct answer using the code given below:
    A 1 only Correct Answer Incorrect Answer
    B 2 only Correct Answer Incorrect Answer
    C 3 only Correct Answer Incorrect Answer
    D Both 1 and 2 Correct Answer Incorrect Answer
    E Both 2 and 3 Correct Answer Incorrect Answer

    Solution

    It is generally negative but Giffen goods have a positive price elasticity of demand. The income elasticity of demand is positive but less than 1 for normal goods. The price elasticity of demand is defined to be the percent change in quantity divided by the percent change in price. If a good has an elasticity of demand greater than 1 in absolute value we say that it has an elastic demand. If the elasticity is less than 1 in absolute value we say that it has an inelastic demand. And if it has an elasticity of exactly −1, we say it has unit elastic demand. Only goods which do not conform to the law of demand, such as Giffen goods, have a positive elasticity.

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