Question

Sunny expanded her business last year by adding a gift shop in her salon. Because of this addition her income has increased by 13%. Although her income has increased, she has a 9% drop in the quantity demanded of hamburgers. In this example, Sunny’s:_____
a. Income elasticity is 69 and the good is a normal good.
b. Cross-price elasticity is 1.44 and the good is an inferior good.
c. Income elasticity is 69 and the good is an inferior good.

Answer 1

Answer:

c. Income elasticity is 69 and the good is an inferior good.

Explanation:

Income elascitiy = percentage change in quantity demanded / percentage change in income

9% / 13% = 0.69 = 69%

An inferior good is a good whose demand falls when income increases and whose demand increases when income falls. When sunnys income increased, she reduced her demand for hamburgers.

A normal good is a good whose demand increases when income increases.

Cross price elasticity of demand measures the responsiveness of quantity demanded of good A to changes in price of good B.

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