Multiple Choice
A twelve percent increase in consumer income has caused the quantity of orange juice demanded to increase from 24,000 to 26,000. The income elasticity of demand for orange juice is:
644
views
7
rank
4. Elasticity
Income Elasticity of Demand
Multiple Choice
If the income elasticity of demand for a good is 0.8, which of the following best describes the good?
A
It is a necessity with negative income elasticity.
B
It is a normal good, but not a luxury.
C
It is a luxury good.
D
It is an inferior good.
Verified step by step guidance1
Recall the definition of income elasticity of demand, which measures the responsiveness of quantity demanded to a change in income. It is calculated as: \[\text{Income Elasticity of Demand} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}\]
Understand the interpretation of income elasticity values: - If the elasticity is positive and less than 1 (0 < elasticity < 1), the good is considered a normal good and a necessity. - If the elasticity is greater than 1, the good is a luxury good. - If the elasticity is negative, the good is an inferior good.
Given the income elasticity of demand is 0.8, note that it is positive and less than 1, which indicates the good is a normal good but not a luxury.
Eliminate options that do not fit this interpretation: - Negative income elasticity would indicate an inferior good, which is not the case here. - A luxury good would require elasticity greater than 1.
Conclude that the best description for the good with an income elasticity of 0.8 is that it is a normal good but not a luxury, often classified as a necessity.
Related Videos
Related Practice
