ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Demand is price inelastic
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The good is inferior
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Income elasticity is-2
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The product has a positive income elasticity of demand
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Detailed explanation-1: -Answers. The percentage change in demand is +20%; the percentage change in income is +10%. This means the product is normal because demand rises with more income and has an income elasticity of +2.
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: -There are five main categories of income elasticity of demand based on the percentage increase or decrease in quantity compared to the increase or decrease in incomes. Starting from the largest positive change, they are called: High, Unitary, Low, Zero, and Negative.
Detailed explanation-4: -When the quantity demanded of a commodity increases with increase in income and decreases with decrease in income, the income elasticity of demand will be positive. This situation prevails in the case of normal commodities.
Detailed explanation-5: -The formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income.