Income Elasticity of Demand: examples and Multiple choice questions

Income Elasticity of Demand:

Income Elasticity of Demand (YED) is a measure of how the quantity demanded of a good or service responds to a change in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. The formula is:

YED= % change in income / % change in quantity demanded

Types of Income Elasticity:

Normal Goods (YED > 0): For normal goods, as income increases, the demand for the good also increases. YED is positive but less than 1 for normal necessities and greater than 1 for normal luxury goods.

Inferior Goods (YED < 0): For inferior goods, as income increases, the demand for the good decreases. YED is negative for inferior goods.

Necessities and Luxuries:

0<YED<1 for necessities.

YED>1 for luxuries.

Examples:

Normal Good: If the income of consumers rises by 10%, and the quantity demanded for smartphones rises by 15%, the YED is 15% / 10% = 1.5 indicating smartphones are a normal good.

Inferior Good: If the income of consumers increases by 10%, but the quantity demanded for cheap instant noodles decreases by 8%, the YED is  −8% / 10% = −0.8  showing instant noodles are an inferior good.

Necessity: If the income of consumers rises by 5%, and the quantity demanded for basic groceries increases by 3%, the YED is  3% / 5% = 0.6 indicating groceries are a necessity.

Multiple Choice Questions:

1. What does the Income Elasticity of Demand measure?

a) Change in price of a good

b) Change in quantity demanded due to income change

c) Change in quantity demanded due to price change

d) Change in supply of a good

2. If the YED for a normal good is 0.8, it means:

a) It is an inferior good

b) The demand decreases with an increase in income

c) The demand increases, but less than proportionately, with an increase in income

d) The demand increases proportionately with an increase in income

3. A YED value of -1.2 indicates:

a) A normal good

b) An inferior good

c) A luxury good

d) A necessity

4. If the YED for a luxury item is 2.5, it means:

a) The demand is inelastic

b) The demand is elastic

c) The demand increases, but less than proportionately, with an increase in income

d) The demand decreases with an increase in income

5. What does a negative YED value suggest?

a) It's a normal good

b) It's an inferior good

c) The demand is inelastic

d) The demand increases proportionately with an increase in income

6. If YED is 0.2, the good is likely a:

a) Necessity

b) Luxury

c) Normal good

d) Inferior good

7. A YED value greater than 1 suggests that the good is:

a) An inferior good

b) A normal good

c) A luxury

d) A necessity

8. If the YED for a good is -0.6, it is likely a:

a) Normal good

b) Inferior good

c) Necessity

d) Luxury

9. A YED of -1.5 implies that the good is:

a) A necessity

b) An inferior good

c) A normal good

d) A luxury

10.If the YED for a good is 1.0, it means:

a) The demand is inelastic

b) The demand is elastic

c) The demand increases proportionately with an increase in income

d) The demand is unaffected by changes in income

(Answers: 1-b, 2-c, 3-b, 4-c, 5-b, 6-a, 7-c, 8-b, 9-b, 10-c)