If a 10 percent increase in income leads to a 5 percent decrease in the demand for a good,the income elasticity of demand equals ________ and the good is ________ good.
A) 1/2; a normal
B) -1/2; an inferior
C) 2; a normal
D) -2; a normal
E) -5; an inferior

Question

Quizplus · Accepted Answer

Income elasticity of demand (Ey) = (% change in demand)/(% change in income)
Given, when income increases by 10%, demand decreases by 5%. So, the (% change in demand)/(% change in income) = -5/10 = -1/2. This gives us Ey = -1/2.
As the income elasticity of demand is negative, the good is an inferior good. Hence, option B is correct.

If a 10 Percent Increase in Income Leads to a 5