Question

Assume that a 4 percent decrease in income results in a 6 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is a. negative, and the good is an inferior good. b. negative, and the good is a normal good. c. positive, and the good is an inferior good. d. positive, and the good is a normal good.

Answer 1

Answer:

The correct answer is option a.

Explanation:

A 4 percent decrease in income results in a 6 percent increase in the quantity demanded of a good.

The income elasticity of demand is the degree of responsiveness of quantity demanded to a change in income. It is measured by the ratio of change in quantity demanded to change in income.

The income elasticity of demand

= $\frac{\% \Delta Q}{\% \Delta Y}$

= $\frac{6}{-4}$

= -1.5

The income elasticity of demand for the good is negative, this implies that the good is an inferior good. The demand for an inferior good is inversely related to income. So a decline in income increases the demand and vice versa.