. Using the income elasticity of demand to characterize goods Data collected fro
ID: 1219953 • Letter: #
Question
. Using the income elasticity of demand to characterize goods
Data collected from the imaginary economy of Tralfamadore reveals that an 18% decrease in income leads to the following changes:
Compute the income elasticity of demand for each of the goods described, and select the appropriate value in the following table. Then indicate whether the income elasticity for each good indicates that it 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 important information is conferred by the sign.
Which of the following three goods is most likely to be classified as a luxury good ?
Lafgar
Farb
Randang
• A 6% decrease in the quantity of lafgar demanded • A 17% increase in the quantity of farb demanded • A 29% decrease in the quantity of randang demandedExplanation / Answer
Income Elasticity of Demand
(Change in Demand / Change in Income)
The sign of Farb is negative because as income decreases its demand increases.So there is a negative ralationship.
Now as we know when income elasticity of demand positive then it is a normal good and when it is negative the good becomes inferior.
The implication behind this is, as income decreases the demand for nomal good will also decreases,but in case of inferior good, when income decreases its demand increases.
Randang is a luxury good because its income elasticity of demand is more than 1.And as we know if the income elasticity of a good is more than 1 that good will be a luxury good because as income decreases a consumers ability to consume a luxury good decreases highly as he or she will not able to consume that good easily.
GoodIncome Elasticity of Demand
(Change in Demand / Change in Income)
Normal or Inferior Lafgar 6 / 18 = 0.33 Normal Farb - 17 / 18 = - 0.94 Inferior Randang 29 / 18 = 1.61 NormalRelated Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.