50000 Because of Kims salary increase Kims annual salary inc

50.000. Because of Kim\'s salary increase Kim\'s annual salary increased from $40,000 to$ her quantity demanded of red wine has changed from 40 to 65 bottles. Having observed Kim\'s market behavior, what type of good is red wine? Select one: O a\' normal O b. inferior O c. a complement o d. a substitute

Solution

Income elasticity of demand = ( ? change in quantity demanded / ? change in income)

? change in quantity demanded of wine = [(65-40)/40]* 100 = 62.5?

And, ? change in income = [(50000 - 40000)/40000]*100 = 25?

Income elasticity of demand for wine = (62.5/25) = 2.5

The value of income elasticity of demand is positive for wine, indicating its a normal good, i.e. quantity demanded increases with increase in income.

Answer- option A