Suppose the income elasticity for transportation is 1.8.Which of the following is an INCORRECT statement?
A) Transportation is a normal good.
B) Expenditures on transportation grow more rapidly than income grows.
C) Expenditures on transportation will fall less rapidly than income falls.
D) Whenever the income increases by 1 percent, the expenditure on transportation increases by 1.8 percent.

Question

Quizplus · Accepted Answer

The income elasticity of demand measures how the quantity demanded of a good responds to a change in income. An elasticity greater than 1, as in this case (1.8), indicates that the good is a luxury good, meaning expenditures on it grow faster than income. However, statement C is incorrect because if income falls, expenditures on transportation (a luxury good) would decrease more rapidly than income, not less rapidly, due to the high income elasticity.

Suppose the Income Elasticity for Transportation Is 1