Question

Data collected from the economy of Pokerville reveals that a 15% decrease in income leads to the following changes: 

A 9% increase in the quantity of clubs demanded . 

A 17% decrease in the quantity of horses demanded . 

A 29% decrease in the quantity of aces demanded 

Compute the income elasticity of demand for each good and use the dropdown menus to complete the first column in the following table. Then, based on its income elasticity, indicate whether each good is a normal good or an inferior good. (Hint: Be careful to keep track of the direction of change. The sign of the income elasticity of demand can be positive or negative, and the sign confers important information.) 

 Which of the following three goods is most likely to be classified as a luxury good ?

•  Clubs

•  Horses

•  Aces

Answer 1

Economy of Pokerville reveals that a 15% decrease in income leads to below.

A 9% increase in the quantity of clubs demanded

Income elasticity of demand= Percentage change in quantity demanded/Percentage change in price

Income elasticity of demand= 9/100/15/100

= 0.6(Since income is decreasing and demand for clubs is increasing, so there is a inverse relationship between income and quantity demanded.

A 17% decrease in the quantity of horses demanded.

Income elasticity of demand= Percentage change in quantity demanded/Percentage change in price

Income elasticity of demand= 17/100/15/100

= 1.13

A 29% decrease in the quantity of horses demanded.

Income elasticity of demand= Percentage change in quantity demanded/Percentage change in price

Income elasticity of demand= 29/100/15/100

= 1.93

Good Income elasticity of demand Normal or Inferior good

Club 0.6 Inferior Good

Horses 1.13 Normal Good

Aces 1.93 Normal Good

Aces is a luxury good

Explanation: Since its income elasticity of demand is 1.93 which is more than 1.13 and for a good to be treated as luxury in economics should have income elasticity of more than 1 and Aces income elasticity of demand is way more than 1 and is 1.93, so it will be treated as Luxury good among these three goods.