Which of the following goods would most likely have an income elasticity of $-2 ?$

Choose 1 answer:
(A) Rice in a country where it is a staple food consumed by most people
(B) Books in a society that values education
(C) Airplane tickets in a society that values travel
(D) Used cars in a society that values new goods

Question

Which of the following goods would most likely have an income elasticity of $-2 ?$

Choose 1 answer:
(A) Rice in a country where it is a staple food consumed by most people
(B) Books in a society that values education
(C) Airplane tickets in a society that values travel
(D) Used cars in a society that values new goods

Accepted Answer

∻Solution∻ ‖ a ⋮ Definition of Income Elasticity: Income elasticity of demand measures how the quantity demanded of a good responds to a change in income. It is calculated as $E_I = \frac{\% \Delta Q_d}{\% \Delta I}$, where $E_I$ is the income elasticity, $\% \Delta Q_d$ is the percentage change in quantity demanded, and $\% \Delta I$ is the percentage change in income. ‖ ‖ b ⋮ Negative Income Elasticity: A negative income elasticity of $-2$ indicates that the good is an inferior good, meaning that as income increases, the demand for the good decreases significantly. Specifically, for every 1% increase in income, the quantity demanded decreases by 2%. ‖ ‖ c ⋮ Analysis of Options: - (A) Rice in a country where it is a staple food consumed by most people: Rice is typically a normal good in such a context, not an inferior good. - (B) Books in a society that values education: Books are likely to be normal or even luxury goods in this context. - (C) Airplane tickets in a society that values travel: Airplane tickets are usually normal or luxury goods. - (D) Used cars in a society that values new goods: Used cars are likely to be inferior goods in this context, as people would prefer new cars if their income increases. ‖ ∻Answer∻ ⚹ (D) Used cars in a society that values new goods ⚹ ∻Key Concept∻ ⚹ Income Elasticity of Demand ⚹ ∻Explanation∻ ⚹ Income elasticity of demand measures how the quantity demanded of a good responds to changes in income. A negative income elasticity indicates an inferior good, where demand decreases as income increases. In this context, used cars are likely to be inferior goods in a society that values new goods. ⚹◊What factors would lead to a good having a negative income elasticity of demand?⍭ Generate me a similar question◊

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