Question

Match the following income elasticity coefficients with the goods below: -0.87, 0.01, 0.68, 2.54

• New furniture:                                             _____________
• Box of Kraft Macaroni and Cheese:          _____________
• A bottle of very expensive wine:              _____________
• A roll of toilet paper:                                  _____________

Answer 1

The toilet paper is a necessity so people obviously buy the same quantity of toilet paper irrespective of the changes in income, the necessity of goods have an income elasticity of demand close to zero. A bottle of expensive wine is considered as a luxury good, for a luxury good the income elasticity of demand is greater than one, that is people buy more of the luxury good when the income increases. The furniture is a normal, for a normal good the income elasticity of demand is always positive that is an increase in the income will increase the quantity demanded of the normal goods. The value will be between zero and one for the normal goods. Macaroni and Cheese are complements and the complementary goods have negative price elasticity of demand.

Ans:

1. New furniture: 0.68.

2. Box of Kraft Macaroni and Cheese: -0.87.

3. A bottle of very expensive wine: 2.54

4. A roll of toilet paper: 0.01.