If incomes fall by 5 percent and the quantity demanded for new cars falls by 10 percent,
A)New cars are a normal good,and the income elasticity is +.5.
B)New cars are an inferior good,and the income elasticity is +2.0.
C)New cars are a normal good,and the income elasticity is +2.0.

Question

Quizplus · Accepted Answer

New cars are a normal good because the quantity demanded decreases as income falls. The income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income, which is -10% / -5% = +2.0.

If Incomes Fall by 5 Percent and the Quantity Demanded