Income rises from $3,500 to $4,000 a month and the quantity demanded of good X falls from 7 to 5 units a month. Income elasticity of demand (for good X) is __________ and good X is a(n) __________ good.
A)-2.50; inferior
B)0.40; normal
C)-2.28; inferior
D)2.50; 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, the percentage change in quantity demanded is ((5-7)/7)*100 = -28.57%, and the percentage change in income is ((4000-3500)/3500)*100 = 14.29%. The income elasticity is -28.57% / 14.29% = -2.00, indicating that good X is an inferior good because the quantity demanded decreases as income increases.

Income Rises from $3,500 to $4,000 a Month and the Quantity