Question

7. Using the income elasticity of demand to characterize good:s Data collected from the economy of Cardtown reveals that an 18% decrease in income leads to the following changes: ·A 6% decrease in the quantity of flops demanded ·A 17% increase in the quantity of clubs demanded A 29% decrease in the quantity of houses demanded Compute the income elasticity of demand for each good and use the dropdown menus to complete the first column in the following table. Then, based on its income elasticity, indicate whether each good is a normal good or an inferior good. (Hint: Be careful to keep track of the direction of change. The sign of the income elasticity of demand can be positive or negative, and the sign confers important information.) Good Flops Clubs Houses Income Elasticity of Demand Normal or Inferior Good Which of the following three goods is most likely to be classified as a luxury good? Flops O Clubs O Houses

Answer 1

income elasticity = % change in quantity demand of flops / % change in income

= -6% / -18%

= 0.33

it is normal goods as fall in income leads to fall in quantity demanded.

income elasticity = % change in quantity demand of clubs / % change in income

= 17/ -18

= - 0.944

interior goods

income elasticity = % change in quantity demand of houses / % change in income

= -29 /-18

=1.61

it is luxury goods income elasticity is >1

house is luxury goods.