4 If income increases from 50000 to 60000 while the demand f

4. If income increases from $50,000 to $60,000 while the demand for a good increases from 100 units to 125 units, what is the income elasticity of demand? Is the good a normal good or an inferior good?

Solution

The percentage change in the demand for the good is given by 25%. The percentage change in the income is given by 20%. The income elasticity of demand is given by the change in demand divided by the change in income. This is given by 1.25.As the income elasticity of demand is positive the good is a normal good.