Question

Suppose income increases by 25 percent​ and, as a​ result, the quantity of a particular brand of automobile demanded​ (holding the price for this particular automobile​ constant) increases by 49 percent

The income elasticity of demand for this brand of car is ____​(Enter your response rounded to two decimal places and include a minus sign if​ appropriate.)

This particular brand of automobile is​ a(n) _____ good

In another​ example, suppose market research shows that a particular brand of truck is a normal good and a luxury.

If​ so, then the income elasticity of demand for this truck is:
1. Less than 1 but greater than 0
2. Negative
3. Greater than 1
4. Positive
5. Zero

Answer 1

(a) normal

1. Less than 1 but greater than 0

Step-by-step explanation:

Estimating demand elasticity of income is the percentage change in demand quantity divided by a percentage change in income.

Therefore, for a normal good, its demand's income elasticity would be positive.

In this scenario the demand income elasticity is 1/25 = 0.4.

So here the truck is indeed a normal good because the value is positive.