You are the owner of a firm that makes generic paper products. You estimate the income elasticity for your paper towels to be - 1.5. An economic recession will have which of the following effects on the demand for your paper products?
A)The demand will increase.
B)The demand will decrease by 15 percent.
C)The demand will decrease.
D)There will be no effect on demand.

Question

Quizplus · Accepted Answer

Given the income elasticity is -1.5, this indicates that the product is an inferior good (negative elasticity). During a recession, when incomes fall, demand for inferior goods typically increases, hence the demand for the paper products will increase.

You Are the Owner of a Firm That Makes Generic