Question

Data collected from the economy of Cardtown reveals that an 11% decrease in income leads to the following changes: • A 9% increase in the quantity of clubs demanded • A 10% decrease in the quantity of chips demanded • A 30% decrease 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 Clubs Chips Diamonds Which of the following three goods is most likely to be classified as a luxury good ? O Clubs Diamonds O Chips

Income Elasticity of Demand Normal Or Inferior Good

Clubs (-1.22, -0.82, 0.82, 1.22) (Normal, Inferior)

Chips (-1.1, -0.91, 0.91, 1.1) (Normal, Inferior)

Diamonds (-2.73, -0.37, 0.37, 2.73) (Normal, Inferior)

Answer 1

Good	Income elasticity of Demand	Normal/Inferior Good
Clubs	-0.82	Inferior
Chips	0.91	Normal
Diamonds	2.73	Normal

Income elasticity of demand = % change in quantity demanded / % change in income

Luxury good - Diamonds (income elasticity > 1)