10 10000003ed81 Ipla: Student Question Elasticity and Its Application (Mobile-Enabled) Graded Assignment | Read Chapter 5 1 Back to Assignment Oue Sunday 01.28.18 at 11:45 Attempts 1.7 0.3 7. Using the income elasticity of demand to characterize goods Data collected from the economy of Royal City reveals that a 15% decrease in income leads to the flewing changes: Keep the Highest: 1.7/2 A 1% decrease in the quantity of dips demanded ·A 10% increase in the quantity of spades demanded A 30% decrease in the quantity of diamonds demanded Compute the income elastioty of demand for each good and use the dropdown menus to complete the first column in the following table. Then, based good. (Hint: Be careful to keep track of the direction of change on its income elasticity, indicate whether each good is a normal good or an inferior The sign of the income elasticity of demand can be positive or negative, and the sign confers important information.) GoodIne Income Elasticity of Demand Normal or Inferior Good Chips Spades Diamonds Which of the following three goods is most likely to be dlassified as a luxury good ? Diamonds O Spades O Chips Save & C Continue wthout saving
The demand for a product gets influenced by its own price, income of the consumer and the availability of related goods. Income elasticity of demand indicates us the percentage change in quantity demanded for each 1 percent change in the income of the consumer. Here income decreases by 15%.
In consequence, the income elasticity of chips becomes = -1%/-15% = 0.067. Since income and quantity demanded both are reduced, chips are normal goods.
Also, the income elasticity of spades becomes = 10%/-15% = -0.667. Since income is reduced and quantity demanded is increased, spades are inferior goods.
Finally income elasticity of diamonds becomes = -36%/-15% = 2.4 Since income and quantity demanded both are reduced, diamonds are normal goods.
Diamonds are luxury goods because an income reduction makes individual poorer and he no longer buys luxuries. Hence the consumption of luxuries fall by a large amount.
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