A firm knows that Seneca's income elasticity of demand for hair ties is 5; for Janelle,it is 0.2.A firm can reason that a hair tie is a(n)________ good for Seneca while it is a(n)________ good for Janelle.
A) normal; inferior
B) complement; substitute
C) necessity; luxury
D) inferior; normal
E) luxury; necessity

Question

Quizplus · Accepted Answer

Income elasticity of demand measures how the quantity demanded of a good responds to a change in income. A good with an income elasticity greater than 1, like in Seneca's case (5), is considered a luxury good because demand increases more than proportionally as income increases. A good with an income elasticity between 0 and 1, like in Janelle's case (0.2), is considered a necessity because demand increases with income but less than proportionally.

A Firm Knows That Seneca's Income Elasticity of Demand for Hair