If incomes fall by 5 percent and the quantity demanded for new cars falls by 10 percent,
A)New cars are a normal good,and the income elasticity is +.5.
B)New cars are an inferior good,and the income elasticity is +2.0.
C)New cars are a normal good,and the income elasticity is +2.0.
D)New cars are an inferior good,and the income elasticity is +0.5.

Question

Quizplus · Accepted Answer

New cars are a normal good because the quantity demanded decreases as income falls, indicating a direct relationship between income and demand. The income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income, which is +2.0 (10% / 5% = 2).

If Incomes Fall by 5 Percent and the Quantity Demanded