ECONOMICS
ELASTICITY OF DEMAND
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
Fancy restaurant meals.
|
|
|
Vacations.
|
|
|
Day-old bakery goods at a discount bakery.
|
|
|
New cars.
|
Detailed explanation-1: -20. Which of the following is most likely to have a negative income elasticity of demand? As incomes rise, people tend to shift away from buying day-old bakery goods and instead buy fresh bakery goods, implying a negative income elasticity.
Detailed explanation-2: -Inferior goods have a negative income elasticity of demand; as consumers’ income rises, they buy fewer inferior goods. A typical example of such a type of product is margarine, which is much cheaper than butter.
Detailed explanation-3: -Thus, the correct option is C. Other given commodities (designer goods, tennis balls, and frozen yogurt) are more of normal goods-when income increases, their demand will increase.
Detailed explanation-4: -The price elasticity of demand is ordinarily negative because quantity demanded falls when price rises, as described by the “law of demand". Two rare classes of goods which have elasticity greater than 0 (consumers buy more if the price is higher) are Veblen and Giffen goods.
Detailed explanation-5: -When the income elasticity of demand is negative, the good is called an inferior good. The concepts of normal and inferior goods were introduced in Demand and Supply.