If the income elasticity of demand is 0.5,the good is
A)a luxury.
B)a normal good (but not a luxury).
C)an inferior good.
D)a Giffen good.

Question

Quizplus · Accepted Answer

If the income elasticity of demand is positive, then the good is a normal good i.e. as income rises, demand for the good also rises. If the income elasticity of demand is less than 1 (but still positive), then the good is not a luxury (because luxury goods have an income elasticity greater than 1) but a necessity or a normal good. A value of income elasticity of demand between 0 and 1 indicates that the good is a necessity or a normal good, but not a luxury. Therefore, option B is the correct answer.

If the Income Elasticity of Demand Is 0