Joe receives a 20 per cent increase in his income from his part-time job and as a consequence decreases his consumption of two-minute noodles by 10 per cent. Hence to Joe, two-minute noodles are
A) a substitute good with a cross elasticity of 0.5.
B) an inferior good with an income elasticity of -0.5.
C) an inferior good with an income elasticity of -2.0.
D) a good with a price elasticity of supply of -0.5.
E) a normal good with a price elasticity of demand of 0.5.

Question

Quizplus · Accepted Answer

Since Joe decreased his consumption of two-minute noodles as his income increased, these noodles are an inferior good. The negative income elasticity of demand indicates that as income increases, the quantity demanded of the good decreases. The coefficient value of -0.5 means that a 20% increase in income leads to a 10% decrease in the quantity demanded of two-minute noodles. Therefore, option B is the correct choice.

Joe Receives a 20 Per Cent Increase in His Income