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.

e. Beer.

A) Normal and necessity. Beer is the cheapest type of alcohol and tends to be consumed by individuals with lower income. As income increases people substitute wine and liquor for beer. Elasticity for beer is therefore positive and less than one.

B) Normal and necessity. Beer is the cheapest type of alcohol and tends to be consumed by individuals with lower income. As income increases people purchase more beer. Elasticity for beer is therefore positive and greater than 1.

C) Inferior. Beer is the cheapest type of alcohol and tends to be consumed by individuals with lower income. As income increases people substitute wine and liquor for beer. Elasticity for beer is therefore positive but less than 1.

D) Normal and necessity. Beer is the cheapest type of alcohol and tends to be consumed by individuals with lower income. As income increases people purchase much more beer. Elasticity for beer is therefore positive and equal to 1, so its consumption increases significantly with income (elasticity is positive and greater than 1).

Explanation / Answer

Option C is correct.

Inferior goods have the property that as the income of the consumer increases, the consumer would substitute higher quality goods to lower quality goods. In this case, the beer is seen as an inferior good.

The income elasticity of demand for inferior good is negative, due to the opposite movements of income and quantity demanded.

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