Suppose good X has a positive income elasticity of demand. This implies that good X could be
A) (i) only
B) (i) and (ii) only
C) (i), (ii), and (iv) only
D) (iii) only

Question

Quizplus · Accepted Answer

If good X has a positive income elasticity of demand, it means that as income increases, demand for the good also increases. This implies that good X is likely to be a normal good, which means that as income increases, consumers are able and willing to spend more on it.

(i) is incorrect because a positive income elasticity of demand does not necessarily imply that the good is inferior.

(ii) is correct because a positive income elasticity of demand is one of the characteristics of a normal good, which is a type of superior good.

(iii) is incorrect because a positive income elasticity of demand does not necessarily imply that the good is a luxury good.

(iv) is correct because a positive income elasticity of demand indicates that the good is likely to have a positive cross-price elasticity of demand with other goods, meaning that as the price of other goods increases, demand for good X also increases.

Suppose Good X Has a Positive Income Elasticity of Demand