Suppose the income elasticity of demand for toys is -2.5. This means that
A)a 3 percent increase in income will decrease the purchase of toys by 7.5 percent.
B)a 3 percent increase in income will decrease the purchase of toys by 1.2 percent.
C)a 3 percent increase in income will increase the purchase of toys by 7.5 percent.
D)toys are a normal good.

Question

Quizplus · Accepted Answer

The income elasticity of demand indicates how the quantity demanded of a good responds to a change in income. A negative elasticity, like -2.5, means the good is an inferior good, and demand decreases as income increases. A 3% increase in income leads to a 7.5% decrease in demand for toys (3% * -2.5 = -7.5%).

Suppose the Income Elasticity of Demand for Toys Is -2