Question

7. Using the income elasticity of demand to characterize goods Data collected from the economy of Pokerville reveals that an 18% decrease in income leads to the following changes: . A 6% decrease in the quantity of horses demanded . A 17% increase in the quantity of clubs demanded . A 29% 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.) Income Elasticity of Demand Normal or Inferior Good Good Horses Clubs Diamonds Which of the following three goods is most likely to be classified as a luxury good? O Clubs Diamonds Horses O Horses

Answer 1

Income elasticity of Demand of horses=(% change in quantity demanded)/quantity demanded/(% change in Income)/Income

=6%/18%=0.33

Inelastic

Horses are normal good

Income elasticity of Demand of clubs=(% change in quantity demanded)/quantity demanded/(% change in Income)/Income

=17%/18%=0.9444

Inelastic or very much close to unitary elastic

Clubs are Inferior goods

Income elasticity of Demand of diamonds=(% change in quantity demanded)/quantity demanded/(% change in Income)/Income

=29%/18%=1.611

Elastic

Diamonds are Luxury goods because %increase in the income level are lower than % change in consumption of goods in question

DIAMONDS are luxury good for above reason

Answer 2

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