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Cross-Price and Income Elasticities

Average incom...

Question

Average income increases from INR 20,000 p.m. to INR 22,000 p.m. Quantity demanded per month increases from 5000 to 6000 units. Which of the following is correct?

Demand is price inelastic

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The good is inferior

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Income elasticity is -2

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The product has a positive income elasticity of demand

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Solution

The correct option is D
The product has a positive income elasticity of demand

The percentage change in demand is +20%; the percentage change in income is +10%. This means the product is normal because demand rises with more income and has an income elasticity of +2.

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