Suppose that studies show that the income elasticity of demand for cigarettes is approximately five. What does this mean?
A) A five percent increase in income leads to a one percent increase in cigarette consumption.
B) A one percent increase in income leads to a five percent increase in cigarette consumption.
C) Cigarettes are a relatively elastic product.
D) A one percent decrease in the price of cigarettes leads to a five percent increase in cigarette consumption.

Question

Quizplus · Accepted Answer

The income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers' income, with all other factors being constant. An elasticity of five means that a 1% increase in income leads to a 5% increase in the demand for cigarettes, indicating that cigarettes are a normal good with a high income elasticity.

Suppose That Studies Show That the Income Elasticity of Demand