Data collected from the economy of Cardtown reveals that a 19% increase in incom
ID: 1155262 • Letter: D
Question
Data collected from the economy of Cardtown reveals that a 19% increase in income leads to the following changes:
• A 12% decrease in the quantity of clubs demanded
• A 15% increase in the quantity of flops demanded
• A 38% increase in the quantity of diamonds demanded
Compute the income elasticity of demand for each good and use the drop down menus to complete the first column in the following table. Then, based on its income elasticity, indicate whether each good is a normal good or an inferior good. (Hint: Be careful to keep track of the direction of change. The sign of the income elasticity of demand can be positive or negative, and the sign confers important information.)
Which is the luxury good?
Good Income Elasticity of Demand Normal or Inferior Good Clubs - 1.58 or - 0.63 or 0.63 or 1.58 Normal or Inferior Flops - 1.27 or - 0.79 or 0.79 or 1.27 Normal or Inferior Diamonds - 2 or - 0.5 or 0.5 or 2 Normal or InferiorExplanation / Answer
The formula for income elasticity is as follows:
e = % change in quantity demanded / % change in income
1) Income elasticity of clubs = 12 / -19 = - 0.63. Since this is negative, the good is an inferior good.
2) Income elasticity of Flops = 15 / 19 = 0.79. Since this is positive, the good is a normal good.
3) Income elasticity of Diamonds = 2. Since this is positive, the good is a normal good. Also, since the elasticity is greater than 1, the good is a luxury good.
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