Assume that a four per cent increase in income results in a two per cent increase in the quantity demanded of a good. The income elasticity of demand for the good is:
A) negative and therefore the good is an inferior good
B) negative and therefore the good is a normal good
C) positive and therefore the good is an inferior good
D) positive and therefore the good is a normal good

Question

Quizplus · Accepted Answer

The income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income. Here, it is given that a 4% increase in income results in a 2% increase in quantity demanded. So, the income elasticity of demand = 2/4 = 0.5, which is positive. According to the sign and magnitude of the income elasticity, the good is a normal good.

Assume That a Four Per Cent Increase in Income Results