tid-902013d 351514 ymentld-56722123237818318522243572&keISBN-97813370965468ksna

Question

tid-902013d 351514 ymentld-56722123237818318522243572&keISBN-97813370965468ksna O https//ng.cenga MINDTAP static/nb/ui/evo/i tFrum Cengage Homework (Ch 05) Average: 12 7. Using the income elasticity of demand to characterize goods Data collected from the economy of Cardtown reveals that a 16% i A 6% increase in the quantity of horses demanded A 14% decrease in the quantity of spades demanded A 29% increase in the quantity of diamonds 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 Horses Spades Diamonds Income Elasticity of Demand Normal or Inferior Good Normal NormalY Which of the following three goods is most likely to be classified as a luxury good ? Type here to search

Explanation / Answer

Income elasticity of demand (Ey) = % Change in demand / % Change in income.

A good is normal (inferior) if its income elasticity is positive (negative), and a luxury if it is higher than +1.

(1)

(a) Ey, Horses = +6%/ +16% = 0.375 (Normal good, since Ey > 0)

(b) Ey, Spades = -14% / +16% = -0.875 (Inferior good, since Ey < 0)

(c) Ey, Diamonds = +29% / +16% = 1.8125 (Normal good, since Ey > 0)

(2)

Diamonds is a luxury good (since Ey > 1).

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.