Suppose national income is rising steadily at 2 percent per year over a 5- year period. Over the same time period, suppose quantity demanded for iPods and iPhones increases at 5 percent per year, but no other relevant variables are changing. We can conclude that the income elasticity for these products is and that these products are goods.
A) 0.4; inferior
B) 2.5; luxury
C) 10.0; necessities
D) 4.0; necessities
E) 4.0; normal

Question

Quizplus · Accepted Answer

The income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income. Here, it is 5%/2% = 2.5, indicating that iPods and iPhones are luxury goods, as the elasticity is greater than 1.

Suppose National Income Is Rising Steadily at 2 Percent Per