Assume that a 4 percent increase in income in the economy produces an 8 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is:Multiple Choicenegative and therefore X is an inferior good.negative and therefore X is a normal good.positive and therefore X is an inferior good.positive and therefore X is a normal good.
Question
Assume that a 4 percent increase in income in the economy produces an 8 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is:Multiple Choicenegative and therefore X is an inferior good.negative and therefore X is a normal good.positive and therefore X is an inferior good.positive and therefore X is a normal good.
Solution
The coefficient of income elasticity of demand is calculated by the percentage change in quantity demanded divided by the percentage change in income. In this case, it is an 8 percent increase in quantity demanded divided by a 4 percent increase in income, which equals 2.
The sign of the income elasticity of demand determines whether the good is a normal good or an inferior good. If the coefficient is positive, the good is a normal good, meaning that as income increases, the demand for the good also increases. If the coefficient is negative, the good is an inferior good, meaning that as income increases, the demand for the good decreases.
In this case, the coefficient is positive (2), so the correct answer is: "positive and therefore X is a normal good."
Similar Questions
Suppose that a 20% increase in income generates a 15% increase in the quantity of X demanded. The income elasticity of demand for good X isMultiple Choicenegative and therefore X is an inferior good.positive and therefore X is a normal good.negative and therefore X is an complementary good.positive and therefore X is a substitute good.
Assume that a 3% increase in income across the economy produces a 1% decrease in the quantity of fast food demanded. The income elasticity of demand for fast food is ____________, and therefore fast food is _______________Multiple Choicenegative; an inferior good.negative; a normal good.positive; an inferior good.positive; a normal good.
If the income elasticity coefficient is negative, it means thatmultiple choice 2the good is normal so that if price falls, the quantity demanded of the good will rise.the good is inferior so that if price falls, the quantity demanded of the good will rise.the good is inferior so that if income falls, the quantity demanded of the good will rise.the good is inferior so that if income falls, the quantity demanded of the good will fall.
A negative income elasticity of demand indicates that the productMultiple Choiceis an inferior good.is a normal good.is a complementary good.is a substitute good.
The definition of a normal good suggests that theMultiple Choiceincome elasticity of demand for the good is negative.price elasticity of demand for the good is negative.income elasticity of demand for the good is greater than 0.cross-price elasticity of demand for the good is positive.
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