Suppose national income is rising steadily at 2% per year over a 5-year period.Over the same time period,suppose quantity demanded for iPods and iPhones increases at 5% per year,but no other relevant variables are changing.We can conclude that the income elasticity for these products is ________ and that these products are ________ goods.
A)0.4; inferior
B)4.0; normal
C)2.5; luxury
D)10.0; necessities
E)4.0; necessities

Question

Quizplus · Accepted Answer

The income elasticity of demand measures the responsiveness of quantity demanded to a change in income. When income elasticity is greater than 1, the good is considered a luxury while an income elasticity between 0 and 1 indicates a normal good. In this case, the income elasticity for iPods and iPhones is 5%/2% = 2.5, which suggests that they are luxury goods. Option A is incorrect because the income elasticity is greater than 1. Option B is incorrect because a 5% increase in demand suggests that the products are not normal goods. Option D and E are incorrect because necessities typically have a low income elasticity.

Suppose National Income Is Rising Steadily at 2% Per Year