Apps Blackboard My ASUh TV Shows and Movie Pearson Sign In Moblab i Cengage MIND

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Apps Blackboard My ASUh TV Shows and Movie Pearson Sign In Moblab i Cengage MINDTAP HW3: Elasticity and Its Application Back to Assignment Keep the Highest:12 Attempts 7. Using the income elasticity of demand to characterize goods Data collected from the economy of Pokervile reveals that a 1S% decrease in income leads to the following changes: A9%increase in the quantity of spades demanded A 17% decrease in the quantity of nops demanded A 29% decrease in the quantity of damonds demanded table. Then, bas Compute the income elastioiy of demand for each good and use the dropdown menus to complete the first column in the followinyg onits income elasticity, nicate whether each good is a normal good or an inferior good. (Hint: Bereful to keep track of The sign of the income elasticity of demand can be positive or negative, and the sign conters important information.) Income Elasticity of Demand Normal or Inferior Good Good Spades Flops Diamonds Which of the following three goods is most likely to be classified as a luxury good? Flops Spades Diamonds Save & Continue Contrue weout saving Grade It Now

Explanation / Answer

Income elasticity = percentage change in quantity demanded/ percentage change in income

If income elasticity is positive, commodity is normal good

In case of positive income elasticity, if it is less than one, commodity is necessity

In case of positive income elasticity, if it is more than one, commodity is luxury

If income elasticity is negative, commodity is inferior good

Calculation of income elasticity

Percentage change in income: 15 % decrease = -15%

Commodity: Spade

Percentage change in demand = 9% increase = 9%

Therefore income elasticity = 9% /-15% = - 0.6

Since income elasticity is negative , spade is an inferior good

Commodity: Flops

Percentage change in demand = 17% decrease = -17%

Therefore income elasticity = -17%/-15% = + 1.133

Since income elasticity is positive , Flops is a normal good.

Commodity: Diamonds

Percentage change in demand = 29% decrease = -29%

Therefore income elasticity = -29%/-15% = + 1.933

Since income elasticity is positive , Diamond is a normal good.

As income elasticity of diamond is positive and high (1.933), diamonds are more likely to be classified as luxury good. note flops has income elasticity greater than one. So by definition it should be categorized as luxury good but it is close to one. Therefore of the three goods, diamonds have greater chance of being categorised as luxury goods.

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