Suppose that when your wealth increases from $100,000 to $200,000, your holdings of stock mutual funds increases from $20,000 to $50,000. Your wealth elasticity of demand for stock mutual funds then is
A)less than 1 and stock mutual funds are a necessity asset.
B)greater than 1 and stock mutual funds are a luxury asset.
C)less than 1 and stock mutual funds are a luxury asset.
D)greater than 1 and stock mutual funds are a necessity asset.

Question

Quizplus · Accepted Answer

The wealth elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in wealth. In this case, the percentage change in quantity demanded of stock mutual funds is (50,000-20,000)/20,000 = 150%, and the percentage change in wealth is (200,000-100,000)/100,000 = 100%. Therefore, the wealth elasticity of demand is 150%/100% = 1.5, which is greater than 1. When the elasticity is greater than 1, the good is considered a luxury asset, meaning that as wealth increases, the percentage increase in quantity demanded is greater than the percentage increase in wealth.

Suppose That When Your Wealth Increases from $100,000 to $200,000