Explain the concept of income elasticity of demand. Give an example of a good that might...

Explain the concept of income elasticity of demand. Give an example of a good that might have a negative income elasticity of demand and justify your choice.

Expert Solution

Income elasticity of demand refers to the proportional change in demand due a proportional change in the income of the consumer.

Income elasticity of demand = % change in demand / % change in income

A good that has a negative income elasticity of demand is called an inferior good. An example of such a good is a cheap cereal (non branded one). As your income increases, you might substitute away from low cost low brand cereal to a better branded cereal and thus the income elasticity is negative.

Rahul Sunny answered 2 years ago

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