Question

If the income elasticity of a good is known to be​ 0.5, as income​ rises, consumers will buy ______ of the​ good, and the proportion of the budget spent on the good will ______.

Answer 1

As income rises, consumers will buy more of the good, but at a slower rate than the increase in income. The proportion of the budget spent on the good will decrease as income rises.

Step-by-step explanation:

The income elasticity of a good measures how responsive the quantity demanded of that good is to changes in income. In this case, the income elasticity is known to be 0.5, which means that as income rises, the quantity demanded of the good will increase, but at a slower rate than the increase in income.

For example, if income increases by 10%, the quantity demanded of the good will increase by 5%. This indicates that the good is a normal good, as the demand for it increases with rising income. However, the proportion of the budget spent on the good will decrease as income rises, since the increase in quantity demanded is proportionally less than the increase in income.