Which statement best explains how elasticity and incentives work together in microeconomics?

• A. When demand is elastic, consumers are more responsive to price changes, so incentives like discounts lead to larger changes in quantity demanded.
• B. When demand is inelastic, incentives such as price reductions always result in a proportional increase in quantity demanded.
• C. Elasticity and incentives are unrelated because incentives only affect supply, not demand.
• D. If demand is perfectly elastic, incentives have no effect on consumer behavior.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of price elasticity of demand, which measures how much the quantity demanded of a good responds to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price, expressed as \(\text{Elasticity} = \frac{\% \Delta Q_d}{\% \Delta P}\).
2. Step 2: Recognize that when demand is elastic (elasticity greater than 1), consumers are very responsive to price changes. This means a small change in price leads to a larger change in quantity demanded.
3. Step 3: Understand that incentives, such as discounts or price reductions, act as price changes that influence consumer behavior. When demand is elastic, these incentives cause a significant increase in quantity demanded.
4. Step 4: Contrast this with inelastic demand (elasticity less than 1), where consumers are less responsive to price changes, so incentives like discounts lead to smaller changes in quantity demanded, not necessarily proportional increases.
5. Step 5: Conclude that elasticity and incentives are closely related because the effectiveness of incentives depends on how responsive consumers are to price changes, which is captured by the elasticity of demand.