Question

Data collected from the economy of Pokerville reveals that a 16% increase in income leads to the following changes:

• A 12% increase in the quantity of horses demanded.
• A 14% decrease in the quantity of clubs demanded.
• A 28% increase in the quantity of diamonds demanded.

Compute the income elasticity of demand for each good and use the dropdown menus to complete the first column in the following table.

Good Income Elasticity of Demand Normal or Inferior Good
Horses
Spades
Aces

Which of the following three goods is most likely to be classified as a luxury good?

a. Aces
b. Spades
c. Horses

Answer 1

Horses - 0.75 - normal

Clubs- 0.875 - inferior

Diamonds - 1.75 - normal

Diamond is a luxury good

Step-by-step explanation:

Income elasticity of demand measures the responsiveness of quantity demanded to changes in income of the consumer.

Income elasticity of demand = percentage change in demand / percentage change in income

Income elascitiy for horses = 12% / 16% =

Income elasticity of demand for spades = 14% / 16% = 0.875

Income elasticity of demand for diamonds 28% / 16% = 1.75

A normal good is a whose demand increases when income increases and falls when income falls.

An inferior good is a good whose demand increases when income falls and whose demand falls when income increases.

Horses and diamonds are normal goods because the demand for the goods increases with income while clubs are inferior goods because the demand for the goods falls when income rises.

A luxury good is a good whose demand rises more than the rise in income. The demands for diamonds increase more than the increase in income, so diamonds are luxury goods.

I hope my answer helps you