Question

Which of the following goods (with their respective income elasticity coefficients in parentheses) will most likely suffer a decline in demand during a recession?

a.plasma screen and LCD TVs (+4.2)
b.chicken purchased at the grocery store for preparation at home (+0.25)
c. dinner at a nice restaurant (+1.8)
d.second-hand clothing (-0.6)

Answer 1

During a recession, plasma screen and LCD TVs, with a high income elasticity of +4.2, will most likely suffer a decline in demand as they are considered luxury goods.

Step-by-step explanation:

The goods that are likely to suffer a decline in demand during a recession are those with high income elasticity of demand. This coefficient measures how much the quantity demanded of a good responds to a change in consumers' income.

Among the options presented, plasma screen and LCD TVs, with an income elasticity of +4.2, are considered as luxury goods and thus, are more likely to see a significant decrease in demand during a recession. This is because as incomes fall, spending on luxury goods which are not necessities, is often greatly reduced.