Suppose the income elasticity for transportation is 1.8.Which of the following is an incorrect statement?
A)Transportation is a normal good.
B)Expenditures on transportation grow more rapidly than income grows.
C)Expenditures on transportation will fall less rapidly than income falls.
D)Whenever the income increases by 1%, the expenditure on transportation increases by 1.8%.

Question

Quizplus · Accepted Answer

Option A is correct as a positive income elasticity means that transportation is a normal good.

Option B is correct as an income elasticity greater than 1 means that expenditures on transportation will grow more rapidly than income.

Option D is correct as the income elasticity measures the percentage change in quantity demanded in response to a percentage change in income, and a value of 1.8 means that whenever the income increases by 1%, the expenditure on transportation increases by 1.8%.

Option C is incorrect as the correct statement is that expenditures on transportation will fall more rapidly than income falls, as a positive income elasticity implies that transportation is a normal good and people will reduce expenditures on it when their income falls.

Suppose the Income Elasticity for Transportation Is 1