Econ help Data collected from the imaginary economy of Ilium

Econ help:

Data collected from the imaginary economy of Ilium reveals that a 15% decrease in income leads to the following changes A 9% increase in the quantity of degdan demanded A 17% decrease in the quantity of pubrork demanded A 29% decrease in the quantity of welk demanded Compute the income elasticity of demand for each of the goods described, and select the appropriate value in the following table. Then indicate whether the income elasticity for each good indicates that it is a normal good or an inferior good Be careful to keep track of the direction of change. The sign of the income elasticity of demand can be positive or negative, and important Hint: information is conferred by the sign Good Income Elasticity of Demand Normal or Inferior Good Degdan Pubrork Welk Which of the following three goods is most likely to be classified as a luxury good O Degdan Welk O Pubrork

Solution

Income elasticity of demand = % Change in quantity demanded / % Change in income

A good is normal if its income elasticity is positive (i.e. quantity demanded increases/decreases as income increases/decreases).

(a) Degdan: Elasticity = 9% / - 15% = - 0.6 < 0

Degdan is inferior good.

(b) Pubrork: Elasticity = - 17% / - 15% = 1.13 > 0

Pubrork is normal good.

(c) Welk: Elasticity = - 29% / - 15% = 1.93 > 0

Welk is normal good.

(d) A luxury good is one, whose quantity demanded increases more than proportionately relative to increase in income. Welk seems a luxury good because, with 1% increase in income, quantity demanded for Wlk increases 1.93%.