GMAT Verbal Section
Reading Comprehension
According to economic theory, there is a clearly observable relationship between the price of a product and the demand for a product. As price increases, the demand for a specific product will fall relative to the increase in price. As a simple example, a 10% increase in the price of soup might correspond to a 20% decrease in consumer demand.However, this relationship is not observed to the same extent in all goods. The extent to which a change in price influences demand is known as price elasticity. It is calculated by dividing the change in demand by the change in price. In the above example, the can of soup would have a price elasticity of 2, which would be considered a high elasticity. High elasticity is observed in goods that can easily be replaced with different or similar products.
On the other hand, some products are considered to be relatively inelastic, which implies that an increase in price will not result in a marked decrease in demand. Essential goods, or those that cannot easily be replaced with other similar goods, would be less elastic than the can of soup discussed above.
1. Based on the information presented, what can be inferred about highly elastic goods?
A) Following a price reduction, demand would increase at a higher rate than it would for inelastic goods.
B) Following a price increase, demand would decrease at a slower rate than it would for inelastic goods.
C) If prices remained stable over time, the demand for these goods would eventually decrease.
D) Compared to inelastic goods, prices for highly elastic goods are generally more stable and predictable.
E) Elastic goods are generally less expensive overall than those classified as inelastic.
Correct Answer: A
Explanation: A high elasticity implies that demand is greatly influenced by price. This relationship would work both ways. A price increase would correspond with a relatively dramatic reduction in demand, so a price decrease would correspond with a relatively dramatic increase in demand compared to inelastic goods.
2. Which of the following would have strengthened the argument that certain goods are considered inelastic?
A) Discussing the fact that the market supply of these goods is relatively inelastic as well
B) Providing numbers that could be used to calculate the lower elasticity of a good
C) Presenting several examples of goods that are considered essential by consumers
D) Identifying examples of situations when a price increase results in increased demand
E) Giving an example of a situation in which elastic goods may be considered inelastic
Correct Answer: C
Explanation:The discussion of elastic goods identifies soup as a good example. Relying on this example, the reader can understand why a price increase would correspond with a decrease in demand. There are many brands of soup on the market, so the consumer could simply replace it with another brand. The discussion of inelastic goods could have been strengthened by identifying examples rather than just characteristics. For instance, identifying gasoline as an inelastic good would have strengthened the argument. The reader would understand that an increase in price would not result in a significant decrease in demand because people will still have to travel, and the need for the good cannot easily be eliminated.
