Multiple Choice
For which of the following goods is the income elasticity of demand likely to be the lowest?
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4. Elasticity
Income Elasticity of Demand
Multiple Choice
Which of the following statements relating to income elasticity of demand is true?
A
Luxury goods have an income elasticity of demand less than zero.
B
Income elasticity of demand measures the responsiveness of quantity demanded to changes in price.
C
A normal good has a positive income elasticity of demand.
D
An inferior good has a positive income elasticity of demand.
Verified step by step guidance1
Step 1: Understand the definition of income elasticity of demand (YED). It measures the responsiveness of the quantity demanded of a good to a change in consumer income, holding other factors constant. The formula is:
\[\text{YED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}\]
Step 2: Recall the typical signs of income elasticity for different types of goods:
- Normal goods have a positive YED (demand increases as income increases).
- Inferior goods have a negative YED (demand decreases as income increases).
- Luxury goods are a subset of normal goods with YED greater than 1 (demand increases more than proportionally as income increases).
Step 3: Evaluate each statement based on these definitions:
- "Luxury goods have an income elasticity of demand less than zero" contradicts the fact that luxury goods have positive YED greater than 1.
- "Income elasticity of demand measures responsiveness to price changes" is incorrect because it measures responsiveness to income changes, not price.
Step 4: Analyze the remaining statements:
- "A normal good has a positive income elasticity of demand" aligns with the definition of normal goods.
- "An inferior good has a positive income elasticity of demand" contradicts the definition since inferior goods have negative YED.
Step 5: Conclude that the true statement is the one about normal goods having positive income elasticity of demand, based on the standard economic definitions and the formula for YED.
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