a. How do you calculate income elasticity?b. If a commodity's income elasticity is 1, is...

a. How do you calculate income elasticity?

b. If a commodity's income elasticity is 1, is it necessity or luxury good? Explain. What does that imply about the relative changes in income and quantity?

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Expert Solution

Answer.

1. Income Elasticity is measured by divinding the % change in quantity/ % change in income. It indicates the change in demand of the good due to the change in income of the person.

2. When the elasicity of income is positive, it means it is a normal good. So if income increases, demand for the good will increase. Income elasticty of 1 indicates that % change in demand is same as % change in income. So, the good is neither necessity nor luxury. For necesssity, change in demand is less due to change income (less than 1 income elasticity of demand) and for luxury, change in demand is more due to change income (more than 1 income elasticity of demand).

Rahul Sunny answered 2 years ago

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