For each of the following goods, state whether it is a normal good, a luxury, a

Question

For each of the following goods, state whether it is a normal good, a luxury, a necessity, or an inferior good. Explain your answers.

d. Cosmetics.

A) Normal and luxury. As income increases people purchase more cosmetics than before. The elasticity of cosmetics is positive and less than 1.

B) Normal and necessity. As income increases people purchase slightly more cosmetics than before. However, since everyone uses cosmetics, the elasticity is positive and greater than 1.

C) Normal and necessity. As income increases people purchase fewer cosmetics than before. When people have higher incomes they do not have to think about how they look, so they buy fewer cosmetics.

D) Normal and luxury. As income increases people purchase more cosmetics than before. The elasticity of cosmetics is positive and likely greater than 1.

Explanation / Answer

People tends to purchase more cosmetics as their income increases. When demand for a good increases as income increases, good is said to be a normal good.

So, cosmetics is a normal good.

However, cosmetics is also a luxury because demand of people for cosmetics tends to increase in greater proportion than increase in income and thus income elasticity of demand for cosmetics is postitve (being a normal good) and is greater than 1 (being a luxury).

Hence, the correct answer is option (D).

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