Question

7. Using the income elasticity of demand to characterize goods Data collected from the economy of Royal City reveals that a 14% decrease in income leads to the following changes: . An 11% increase in the quantity of clubs demanded . A 2% decrease in the quantity of chips demanded . A 27% decrease in the quantity of houses 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 Clubs Chips Houses Income Elasticity of Demand Normal or Inferior Good Which of the following three goods is most likely to be classified as a luxury good? O Chips O Houses O Clubs

Answer 1

Income Elasticity of demand is a measure of responsiveness Of the quantity demanded of a good to a change in income.

It is the ratio of %age change in quantity demanded to %age change in income.

Positive Income Elasticity show good is normal whereas negative income elasticity shows good is inferior.
Income Elasti city ol Deman Change in uantity Demandel /- Charge- in Inco me lubs -048 147 7O.IUy - 1 47 L.92 丨47. Tnome ficit 101 Demand Normal oy Clubs o 78 Chips 0-1y Normal - 2 Noimai