ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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An increase in income will lead to a decrease in demand.
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Good Z is a normal good.
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An increase in income will lead to an increase in demand.
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Good Z must have an inelastic demand.
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Detailed explanation-1: -D. With an income elasticity coefficient of 5, a 10 percent increase in income will lead to a 50 percent increase in the quantity demanded of the good.
Detailed explanation-2: -When a 5% increase in income causes a 3% drop in quantity demanded of a good: a. the income elasticity is 0.6 and the good is an inferior good.
Detailed explanation-3: -If a good or service has an income elasticity of demand below zero, it is considered an inferior good and has negative income elasticity. For example, suppose a good has an income elasticity of demand of-1.5. The good is considered inferior and the quantity demanded for this good falls as consumers’ incomes rise.
Detailed explanation-4: -Answer and Explanation: The correct answer is c. The income elasticity is 0.4 and the good is a normal good. The good is a normal good because demand rises as income rises.
Detailed explanation-5: -What Does an Income Elasticity of Demand of 1.50 Mean? Since the value is positive, the good is elastic. It implies that for every 1% increase in income, people will demand an increase of 1.5% in the number of goods.