Question

Data collected from the economy of Royal City reveals that an 18% decrease in income leads to the following changes: . A 6% decrease in the quantity of flops demanded A 17% increase in the quantity of spades 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.) Income Elasticity of Demand Normal or Inferior Good Good Flops Spades Aces 0.33 0.94 ▼ 1.61 Inferior Normal7 Inferior Which of the following three goods is most likely to be classified as a luxury good ? Spades Flops Aces

Answer 1

Use the rule

Income elasticity of demand for good X = % change in quantity of good X consumed or sold / % change in income

• For Flops, we have income elasticity = -6%/-18% = 0.33. It should be normal as elasticity is positive
• For spades, we have income elasticity = 17%/-18% = -0.94. It should be inferior as elasticity is negative
• For aces, we have income elasticity = -29%/-18% = 1.61. It should be normal as elasticity is positive

Aces since its elasticity is greater than 1.