PRC-3 · Chapter 11 · Question 11 of 57
If a luxury car company calculates that its Income Elasticity of Demand is +2.5, what strategic expectation should the company have during a severe national economic recession?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Sales will drop proportionally more than the drop in average incomes
Explanation
An income elasticity > 1 indicates a luxury good. This means demand is highly sensitive to income; a drop in income during a recession will cause a massive, magnified drop in luxury sales.
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