Suppose empirical analysis concludes that the income elasticity of demand for Kraft Dinner (KD)is -0.2.The interpretation of this result is that
A)a 10% increase in income will lead to a 2% decrease in quantity demanded of KD.
B)a 10% increase in income will lead to a 20% decrease in quantity demanded of KD.
C)a 10% increase in income will lead to a 0.2% decrease in quantity demanded of KD.
D)a 10% increase in income will lead to a 2% increase in quantity demanded of KD.
E)a 10% increase in income will lead to a 20% increase in quantity demanded of KD.

Question

Quizplus · Accepted Answer

The income elasticity of demand is negative, which means that KD is an inferior good. A decrease in income will lead to an increase in quantity demanded of KD. The magnitude of the income elasticity is 0.2, which means that a 10% increase in income will lead to a 2% decrease in quantity demanded of KD (0.2 x 10% = 2%). Therefore, the correct answer is A.

Suppose Empirical Analysis Concludes That the Income Elasticity of Demand