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

Question

Quizplus · Accepted Answer

A good with an income elasticity greater than 1 is considered a luxury, while a good with an elasticity less than 1 is considered a necessity. Mike's elasticity of 5 indicates hair ties are a luxury for him, while Sally's elasticity of 0.2 indicates they are a necessity for her.

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