Question : Which of the following is a limitation of using elasticity measures?
Option 1: They assume linear demand curves.
Option 2: They are difficult to calculate.
Option 3: They do not consider consumer preferences.
Option 4: They only apply to perfectly competitive markets.
Correct Answer: They assume linear demand curves.
Solution : The correct answer is (a) They assume linear demand curves.
One of the limitations of using elasticity measures is that they often assume linear demand curves. Elasticity measures, such as price elasticity of demand, are typically calculated based on the assumption of a linear relationship between price and quantity demanded. However, in reality, demand curves can be nonlinear, especially for goods with unique characteristics or in markets with differentiated products.
Linear demand curves assume a constant slope, implying a consistent percentage change in quantity demanded for every percentage change in price. This assumption may not hold true for all goods and markets. In reality, demand curves can be concave or convex, indicating different degrees of responsiveness to price changes at different price levels.
Therefore, the assumption of linear demand curves limits the accuracy and applicability of elasticity measures in capturing the true responsiveness of quantity demanded to changes in price.