ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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It accounts for only a small proportion of household expenditure.
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It has very few substitutes.
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Household expenditure on milk will decrease if the price of milk increases.
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It is an inferior good.
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Detailed explanation-1: -It was estimated in 2010 that milk had an income elasticity of demand of –0.6. What can be concluded about milk from this information? It accounts for only a small proportion of household expenditure.
Detailed explanation-2: -If a product has an income elasticity of demand of 0.6, then it is income inelastic. A change in the income does not change the demand of the good substantially, and therefore it is a normal good.
Detailed explanation-3: -A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in quantity demanded. If income elasticity of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good.
Detailed explanation-4: -The results show that the demand for whole milk is elastic (1.42) and for skimmed milk is inelastic (0.53).
Detailed explanation-5: -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.