Economics: Principles, Problems, and Policies, 19th Edition

Published by McGraw-Hill Education
ISBN 10: 0073511447
ISBN 13: 978-0-07351-144-3

Chapter 4 - Elasticity - Questions: 9

Answer

An income elasticity of 3.4 would mean that the good is income elastic, and demand would change more than proportionately with income, thus this can be considered a luxury good. An income elasticity of 1 would mean that demand would change proportionately with income. An income elasticity of 0.5 would mean that demand changes less than proportionately with income, and the good can be considered a necessity. A negative income elasticity of demand value would mean that the good is a inferior good.

Work Step by Step

Income elasticity of demand reflects the responsiveness of the demand of a good to changes in income. Dental services, clothing and movies are normal goods, due to their positive income elasticity of demand value. This would mean that an increase in income would increase the demand for these goods, and thus these goods are normal as demand vary positively with changes in income If the sign for the income elasticity of demand was negative, this would mean that the goods are inferior goods, as an increase in income would result in a decrease in quantity demanded for the good. Since demand varies negatively with income, this would mean that they are inferior, such as with second hand cars or canned food. Dental services and clothing are necessities, as the value of their income elasticity of demand are below one, or in the case of clothing is exactly one. The demand for dental services would increase less than proportionately with income, dental services can be concluded as a necessity, as consumers would require dental services regardless of their income, and increases in income, or decreases in income would not significantly affect the demand for dental services, as it is a necessity that needs to be consumed even if income is low. The same applies for clothing. Movies can be considered luxury goods, as the coefficient of income elasticity of demand is not only positive but also more than one. This would imply that a change in income would result in a more than proportionate change in price, as consumers will consume much more of these goods when income is high, and much less of these goods when income is low, as it is luxurious in nature and not required as a necessity.
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