The income elasticity of demand for cars is estimated to be 5.5 in the short run. We can conclude that:
A) when the price of cars reduces by 10 per cent, cars sales increase by 55 per cent.
B) when the price of cars rises by 10 per cent, cars sales increase by 55 per cent.
C) when income rises by 10 per cent, cars sales increase by 55 per cent.
D) when income rises by 10 per cent, cars sales increase by 5.5 per cent.

Question

Quizplus · Accepted Answer

The income elasticity of demand tells us how much a change in income affects the quantity demanded of a good. In this case, an income elasticity of 5.5 means that when income increases by 10%, car sales will increase by 55%. The other options are incorrect because they either refer to price elasticity or mix up the direction of the relationship between price/income and quantity demanded.

The Income Elasticity of Demand for Cars Is Estimated to Be