Final answer:
The income elasticity of demand shows that with a 17% increase in income, there is a significant increase in demand for normal goods and a decrease for inferior goods in Draw City. Necessities exhibit inelastic demand while luxuries show elastic demand.
Step-by-step explanation:
Using the income elasticity of demand as a measure, economists from the imaginary town of Draw City observe changes in consumption patterns based on a 17% rise in income. They witnessed a 30% increase in the quantity of queens demanded, a 13% decrease in the quantity of hearts demanded, and a 12% increase in the quantity of chips demanded. Goods such as queens and chips, which see an increase in demand when income rises, are termed as normal goods. On the other hand, hearts, which experienced a decrease in demand with rising income, fall into the category of inferior goods.
It is important to note that necessity items like housing and electricity typically display inelastic demand, meaning changes in price or income lead to smaller proportional changes in the quantity demanded. Conversely, non-essential items like restaurant meals are elastic and more sensitive to changes in price or income. Precisely, a 10% increase in income led to more than a proportional change in demand for restaurant meals due to their high sensitivity, but the same change in income causes only a minimal adjustment in housing demand.