If a 10 percent increase in income induced a group of consumers to reduce their yearly purchases of potatoes by 5 percent, for these consumers,
A) the income elasticity of potatoes equals approximately 1.05.
B) the income elasticity of potatoes is 0.5.
C) potatoes are a luxury good.
D) potatoes are an inferior good.

Question

Quizplus · Accepted Answer

The decrease in purchases of potatoes in response to an increase in income indicates that potatoes are an inferior good, which means that their income elasticity is negative. A 10 percent increase in income would result in a decrease in purchases of (-5/10) = -0.5, so the income elasticity of potatoes is approximately -0.5.

If a 10 Percent Increase in Income Induced a Group