If income increases by 12 percent and the quantity demanded of a good then decreases by...

If income increases by 12 percent and the quantity demanded of a good then decreases by 6 percent, the good is:

A) inferior and income-inelastic.

B) inferior and income-elastic.

C) normal and income-inelastic.

D) normal and income-elastic.

Expert Solution

Income elasticity = percentage change in quantity demanded / percentage change in price

percentage change in income = 12%

percentage change in quantity demanded = - 6 % (negative sign because as income increases quantity demanded decreases)

income elasticity = -6/12

income elasticity = -0.5 as income elasticity is negative which means as income increases by 1% quantity demanded decreases decreases by 0.5% because of this negative relation between income and quantity demanded good is inferior good

As the absolute value of income elasticity is less than 1 hence demand is income inelastic.

|-0.5| < 1 ( where, |-0.5| = 0.5 only numeric value is considered)

according to the above to statements option A is correct.

(note: if income elasticity > 1 good is income elastic

if income elasticity < 1 good is income inelastic)

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Rahul Sunny answered 1 year ago

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