Here we are asked to consider what might cause own price elasticity to change in value. In this case, elasticity changes from .75 to 1.25; that is, it goes from being inelastic to elastic. We know if the demand curve is linear, an increase in price causes demand to become more elastic; therefore, this is one possible correct answer. When examining the possible choices we have to see if one fits this possibility. One way this could come about is if supply shifts back or decreases, so look for such possibilities. Another possibility is if demand becomes more elastic due to the introduction of a substitute. This is the correct answer in this instance, as we will see below.

11. Which of the following might cause the own price elasticity of demand for product Z to go from .75 to 1.25.

1. A decrease in the manufacturing cost of Z. This would cause supply to increase (or shift out) lowering the price and leading to more inelastic demand, if demand is linear.
2. The introduction of a new product that is considered a close substitute for Z. As we know, this is correct. Close substitutes make demand more elastic because it gives consumers an easy alternative when price rises.
3. An improvement in the manufacturing technology for Z. This would cause supply to increase (or shift out) lowering the price and leading to more inelastic demand, if demand is linear.
4. More firms begin producing product Z. This would cause supply to increase (or shift out) lowering the price and leading to more inelastic demand, if demand is linear.
5. A change in consumer tastes that causes consumers to feel that consuming Z is an important enhancement to their image. This would mean that Z is becoming more hip or fashionable. As a good becomes more fashionable, demand for that good will become more inelastic.