Data collected from the economy of Cardtown reveals that a 16% increase in income leads to the following changes:
• | A 6% increase in the quantity of chips demanded |
• | A 14% decrease in the quantity of clubs demanded |
• | A 29% increase in the quantity of diamonds 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.)
Good | Income Elasticity of Demand | Normal or Inferior Good |
---|---|---|
Chips | choose one: -2.67, -0.37, 0.38, 2.67 | |
Clubs | choose one: -1.14, -0.88, 0.88, 1.14 | |
Diamonds | choose one: -1.81, -0.55, 0.55, 1.81 |
Which of the following three goods is most likely to be classified as a luxury good ?
Chips
Diamonds
Clubs
Income elasticity of demand = % change in quantity demanded / % change in income
1. Income Ed of chips = 6/16 = 0.375 = 0.38
It is a normal Good because Ed > 1 which shows positive relation between income and quantity demanded.
2. Income Ed of clubs = - 14/16 = - 0.875 = - 0.88
It is an inferior good because increase in income decreases its quantity demanded.
3. Income Ed of diamonds = 29/16 = 1.81
It is a normal good because increase in income increases quantity demanded.
4. Diamond is a luxury good because income Ed > 1.
Data collected from the economy of Cardtown reveals that a 16% increase in income leads to...
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