During a recession, the median income falls by 15%. If the demand for grapes falls by 12%, grapes are a normal good with an income elasticity of demand of 0.8. This implies the correct answer is 0.8 normal.
Income elasticity demand measures how some factors affect how consumers demand a product.
Some of the factors that could affect the demand for a product include price and income.
<h2>Further Explanation</h2>
Income elasticity demand is meant to reveal the extent to which the rise in consumer’s income affects the demand for a particular product.
Income elasticity can be expressed as:
Income Elasticity of Demand (YED) = % change in quantity demanded / % change in income
From the given question:
- Change in demand = 0.12
- Change of income = 0.15
If you substitute the value, then you have:
Income elasticity of demand = 0.12 / 0.15
= 0.8
Normal goods are accompanied by positive income elasticity of demand. This also means that more quantity is demanded as the income of the consumer increases.
However, there are five types of income elasticity of demand and these include
- High
- Unitary
- Low
- Zero
- Negative
Therefore, during a recession, the median income falls by 15%. If the demand for grapes falls by 12%, grapes are a normal good with an income elasticity of demand of 0.8
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KEYWORDS:
- recession
- grapes
- normal good
- income elasticity of demand
- 0.8 normal
