Question

Suppose the income elasticity of demand is -0.5 for good X. This implies that a 5% decrease in income will cause the quantity demanded of good X to a. increase by 2.5%, and X is an inferior good. b. decrease by 2.5% and X is a normal good. c. increase by 10% and X is an inferior good. d. decrease by 10% and X is a normal good.

Answer 1

a. increase by 2.5%, and X is an inferior good.

Step-by-step explanation:

The income elasticity of demand is the ratio between the percentage change in demand and the percentage change in income.

The change in demand caused by a 5% decrease in income is:

`-0.5=(\%\ change\ demand)/(\%\ change\ income) \\-0.5=(D)/(-5\%) \\D=+2.5\%`

Demand will increase by 2.5%. A good whose demand increases when consumer income decreases is called an inferior good.

Therefore, the answer is a. increase by 2.5%, and X is an inferior good.