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Chapter 6: Q.15 (page 152)

Income effects depend on the income elasticity of demand for each good that you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true of the income elasticity of the other good you buy?

Short Answer

Expert verified

It must be true of the income elasticity of the other good if buy one of the consumed commodities has a negative income elasticity (poor quality), the other must have a positive income elasticity (normal good). We also know that if a consumer's income improves, he or she will likely consume more of the typical product while consuming less of the inferior commodity.

Step by step solution

01

Definition

Income Elasticity: The ratio of change in quantity demanded to change in income is known as income elasticity.

02

Explanation

Regardless of whether real income falls or rises, the pattern of quantity demanded of goods and services will alter.

Below is the income elasticity of the demand equation.

Incomeelasticityofdemand=%changeinquantitydemanded%changeinincome

03

Conclusion

Therefore, The equation is almost always positive, indicating that as income rises, so does the quantity needed.

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