Demand, Supply, and Elasticity: practice question
Kestrel Foods sells ready-made dinner kits in a large metropolitan market. A consultant lists three possible changes in market conditions. Which change would most likely make the demand for Kestrel's kits more price elastic?
- Customers increasingly treat the kits as a dinner necessity they would keep buying at any price
- A rival chain launches comparable kits with similar recipes and delivery times
- Rising incomes make the kits a smaller share of typical customers' weekly food budgets
Show answer and explanation
Correct answer: B
Explanation: B is correct. Closeness of substitutes is the strongest source of price elasticity: once a rival offers comparable kits, even a small price increase at Kestrel sends many customers across to the alternative and a small price cut draws them back, so the quantity response to any price change grows. A works in the opposite direction because goods regarded as necessities have relatively inelastic demand — buyers keep purchasing them even after sizable price increases. C also reduces elasticity: when an item absorbs only a small share of the budget, buyers barely react to its price, whereas a large budget share is what makes demand price-sensitive.
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