For a household suppose the income elasticity of a commodity is arrived at 0.5; what can be assumed about the nature of the good?
(A) It is a luxurious good
(B) It is an inferior good
(C) It has a zero income elasticity
(D) It is a normal good and fulfils a necessity

Question

Accepted Answer

> [!TLDR] > Income elasticity of +0.5 (positive, but less than 1) means a normal good that is a necessity. ### Step 1 — Recall the rule Income elasticity of demand $E_Y$ classifies goods by sign and size: > [!FORMULA] > $$E_Y = \frac{\%\ ext{change in quantity demanded}}{\%\ ext{change in income}}$$ - $E_Y < 0$ → inferior good - $E_Y = 0$ → income-inelastic (demand unchanged) - $0 < E_Y < 1$ → normal good, a **necessity** - $E_Y > 1$ → normal good, a **luxury** ### Step 2 — Apply the given value Here $E_Y = 0.5$. It is **positive**, so the good is normal (demand rises with income). It is **less than 1**, so demand rises less than proportionately with income — the mark of a necessity. ### Step 3 — Why the other options are wrong - **(A) Luxury** would need $E_Y > 1$. - **(B) Inferior** would need $E_Y < 0$. …

Value of $E_y$	Type of good	Meaning
$E_y < 0$ (negative)	Inferior good	Demand falls as income rises (e.g. coarse grain, second-hand goods)
$E_y = 0$	Neutral	Demand unaffected by income (e.g. salt)
$0 < E_y < 1$	Normal — necessity	Demand rises, but less than proportionately (e.g. food, basic clothing)
$E_y = 1$	Unitary	Demand rises in the same proportion as income

Income Elasticity of Demand

The formula and a worked illustration

Interpreting the values

Step 1 — Recall the rule

Step 2 — Apply the given value

Step 3 — Why the other options are wrong

Step 1 — Recall the rule

Step 2 — Apply the given value

Step 3 — Why the other options are wrong

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