Multiple Choice
Which of the following best explains how income elasticity of demand could affect why Jeremy earns more money than Rose?
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4. Elasticity
Income Elasticity of Demand
Multiple Choice
If the income elasticity coefficient is positive, then the good is a(n) ____ good.
A
inferior
B
Giffen
C
complementary
D
normal
Verified step by step guidance1
Understand the concept of income elasticity of demand, which measures how the quantity demanded of a good responds to a change in consumer income. It is calculated as \(\text{Income Elasticity} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}\).
Recall that if the income elasticity coefficient is positive, it means that as income increases, the quantity demanded for the good also increases.
Recognize that goods with a positive income elasticity are classified as 'normal goods' because demand rises with income.
Contrast this with inferior goods, which have a negative income elasticity (demand decreases as income rises), and Giffen goods, which are a special type of inferior good with upward-sloping demand curves due to strong income effects.
Note that complementary goods relate to cross-price elasticity, not income elasticity, so they are not classified based on income elasticity coefficients.
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