Question

A 5 percent increase in income leads to a 10 percent in the quantity demanded for a service. This service is a(n)_____good, an the demand is______.

A) normal; elastic
B) normal; inelastic
C) normal; unit elastic
D) inferior; elastic
E) inferior; inelastic

Answer 1

A) normal; elastic

Step-by-step explanation:

As we know,

1. Perfectly inelastic = When elasticity is zero

2. Inelastic = When elasticity is below than one

3. Unitary elastic = When elasticity is equal to one

4. Elastic = When elasticity is above than one

5. Perfectly elastic = When elasticity is in infinity

And, the income elasticity of demand would equal to

= (Percentage Change in quantity demanded) ÷ (Percentage Change in income)

= (10%) ÷ (5%)

= 2%

As we see that the income elasticity of demand is more than one which represents the elastic plus in normal good it shows a positive relationship between the income and quantity demanded and the elasticity also comes in positive.