Question

if a good has a negative income elasticity of demand, this indicates that the good is

A. substitute with another good

B. Inferior

C. Normal

D. A complement with another good.

Answer 1

If a good has a negative income elasticity of demand, this indicates that the good is inferior. Income elasticity of demand is measured by using the formula: %change in quantity demanded of a good / % change in the income of the consumer.

If both the change in quantity demanded of a good and change in income of the consumer move in the same direction then the income elasticity is positive. This means that if the income of the consumer increases, then the quantity demanded of the good also increases and vicerversa. This happens in case of normal goods. On the other hand if the change in quantity demanded of the good and income of the consumer move in opposite direction then the income elasticity is negative. This means that if the income of the consumer increases the quantity demanded of the good decreases and viceversa.

When the income of a consumer increases then he would want to substitute an inferior good with a superior, better quality good. This means with the increase in income of the consumer the demand for an inferior good will decrease. Here income of the consumer and demand of the good move in opposite direction.Thus the income elasticity will be negative.

Hence the correct option is B.