ECONOMICS
MARKETS AND PRICES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A 20% increase in income leads to a 60% fall in the quantity demanded
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A 10% increase in price leads to a 30% fall in quantity demanded
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The good is a normal good
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Demand for the good is income inelastic
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Detailed explanation-1: -The income elasticity of-3 means that income elasticity is negative. It indicates that when the income of the consumer increases, the consumption of the product decreases. This happens in the case of inferior goods.
Detailed explanation-2: -If the income elasticity of demand is greater than 1, then the good is normal and income elastic. In addition, the percentage of income spent on the good increases as income increases. If the income elasticity of demand is less than 1 and positive, then the good is normal and income inelastic.
Detailed explanation-3: -Income elasticity of demand measures the responsiveness of demand for a particular good to changes in consumer income. The higher the income elasticity of demand for a particular good, the more demand for that good is tied to fluctuations in consumers’ income.
Detailed explanation-4: -Having an income elasticity of demand less than 1 means that for each 1% increase in income, quantity demanded either increases by less than 1% or decreases. This is because income elasticity can be negative, and thus higher incomes could mean less demand.