Economists classify the goods as NORMAL or INFERIOR or LUXURY GOODS based on the ___ a....

Economists classify the goods as NORMAL or INFERIOR or LUXURY GOODS based on the ___

a. Income elasticity of demand

b. Own price elasticity of supply

c. Own price elasticity of demand

d. Cross price elasticity of demand

Expert Solution

The correct answer is (a) Income elasticity of demand

Formula:

Income elasticity of demand = % change in Demand / % change in Income.

A Good is consider as Normal Good If increase in income results in increase in demand and vice versa . Thus a good is a normal good if % change in Demand / % change in Income > 0.

Hence A good is a normal good if Income elasticity of demand > 0

A good is a Luxury good if % change in Demand > % change in Income.

Hence, A Good is consider as Luxury Good if income elasticity of demand > 1

A Good is consider as an Inferior Good If increase in income results in decrease in demand and vice versa. Hence If Income increases quantity demand decreases and vice versa. Thus Income elasticity of Good = % change in Demand / % change in Income will be negative because If one increases then other will decrease and thus If % change in one is positive then of other is negative.

So, A good is an inferior good if Income elasticity of demand < 0.

Thus, Economists classify the goods as NORMAL or INFERIOR or LUXURY GOODS based on the Income elasticity of demand.

Hence, the correct answer is (a) Income elasticity of demand

Rahul Sunny answered 3 months ago

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