MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be minus2.5 and the price elasticity of demand for all types of breakfast cereals to be minus0.9. The demand for Post Raisin Bran cereal is ▼ elastic inelastic , and the demand for all types of breakfast cereals is ▼ inelastic elastic.

elastic/inelastic

Explanation:

Price elasticity of demand is a concept that seeks to measure the sensitivity of demand to the price of a good or service. Thus, if demand is elastic, it means that even small variations in price have a strong impact on demand. Conversely, if demand is inelastic, variations in the price of the good will not greatly affect demand, meaning consumers will continue to demand that particular good or service. If the elasticity is greater than 1 (in module), demand is considered elastic (price sensitive). Conversely, if elasticity is less than 1 (in module), demand is considered inelastic (little price sensitive). If elasticity equals one, then the change in demand is exactly the same as the price change.

Therefore:

Post Raisin Elasticity: | - 2.5 | > 1, demand for this cereal is elastic.

Other cereals: | - 0.9 | <1, demand for other cereals is inelastic.

Note: The use of modulus is implemented as the calculation of elasticity takes into account variations in prices and quantities, which may have a negative sign. However, what matters is the size of the elasticity and not its sign. That's why we use module.