If a 5 percent increase in income brings about a 10 percent decrease in the demand for a good,then the
A) good is a normal good.
B) good is an inferior good.
C) income elasticity of demand is 0.5.
D) income elasticity of demand is 2.0.
E) income elasticity of demand is 5.0.

Question

Quizplus · Accepted Answer

When a 5 percent increase in income leads to a 10 percent decrease in demand for a good, it means that the good is an inferior good. This is because as consumers' incomes increase, they tend to switch to better-quality substitutes, which are relatively more expensive than the inferior good. The income elasticity of demand (Ei) is calculated as the percentage change in the quantity demanded divided by the percentage change in income. In this case, Ei is (-10%/5%) = -2, which is a negative value consistent with an inferior good.

If a 5 Percent Increase in Income Brings About a 10