7. Income elasticity of demand Aa Aa Data collected in the imaginary economy of

Question

7. Income elasticity of demand Aa Aa Data collected in the imaginary economy of Tralfamadore reveals that a 12% decrease in income leads to the following changes: * A 5% increase in the quantity demanded of farb * A 6% decrease in the quantity demanded of pubrork * A 20% decrease in the quantity demanded of marpod The income elasticity of demand for pubrork is Like the cross-price elasticity of demand, the sign of the income elasticity of demand can be positive or negative, and important information is conferred by the sign.) (Be careful to keep track of the direction of change. According to the income elasticity of demand, marpod is good and farb is good. Which of the following three goods is most likely to be classified as a luxury good? O Farb O Pubrork O Marpod

Explanation / Answer

Q. 7.

Inelastic

Explanation:

Income elasticity of demand for pubrock= % change in demand due to % change in income

= -6%/-12% = .5

Since, Income elasticity of demand is less than 1. Thus, it is inelastic in nature.

Luxury goods                                                     Inferior goods

Explanation:

Income elasticity of demand for Marpod is more than 1 . Thus, it is luxury good. But, demand of Farb is increasing due to decrease in income, so, it is inferior good.

Marpod (Luxury good)

Explanation:

Income elasticity of demand for Marpod = -20%/-12% = 1.667

Income elasticity of demand for Marpod is more than 1. Thus, it is luxury goods.              

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