Data collected from the economy of cardtown reveals that a 16% increase in incom
ID: 1141213 • Letter: D
Question
Data collected from the economy of cardtown reveals that a 16% increase in income leads to the following changes:
- A 12% increase in the quantity of flops demanded
-A 14% decreaase in the quantity of clubs demanded
-A 28% increase in the quantity of aces
Compute the income elasticity of demand for each good Then based on its income elasticity, indicate whether each good is normal or an inferior good.
-Flops( -1.33, -0.75, 0.75, 1.33) (Normal or Inferior)
-Clubs( -1.14, -0.88, 0.88, 1.14) (Normal or Inferior)
-Aces(-1.75, -0.57, 0.57, 1.75) (Normal or Inferior)
Which of the following three goods is most likely to be classified as a luxury good? (Clubs, Aces, or Flops)
% Calibri (Body) | eT | Styles | Editing Dictate Font Paragraph Styles Voice A 12% increase in the quantity of flops demanded A 14% decrease in the quantity of clubs demanded A 28% increase in the quantity of aces demanded . · Compute the income elasticity of demand for each good. Then based on its income elasticity indicate whether each good is a normal or inferior good. Flops (-1.33, -0.75, 0.75, 1.331 (Normal or inferior) Clubs-1.14, -0.88, 0.88, 1.14) (Normal or inferior) Acesf-1.75,-0.57,0.57, 1.75) (Normal or inferior) Which of the three goods is most likely to be classified as a luxury good? Clubs, Aces or Flops + 100 8:28 PM 25-Sep-18Explanation / Answer
Income elasticity of demand is a economic tool that measures the percentage change in the quantity demanded when there is a given percentage change in the income. Its formula is em = %change in Q/% change in M
1) em (flops) = +12%/+16% = +0.75. Since em is +, flops are normal good.
2) em (clubs) = -14%/+16% = -0.875 or -0.88. Since em is -, clubs are inferior good.
3) em (aces) = +28%/+16% = +1.75. Since em is +, aces are normal good.
Luxury goods have an elasticity that is greater than 1. Hence ACES are luxury goods.
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