ACCA BT · Chapter 3 · Question 2 of 11
Average household income rises by 5% and, as a result, demand for a particular product falls by 2%. What is the income elasticity of demand and how would the product be classified?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) -0.4; an inferior good
Explanation
Income elasticity of demand = percentage change in quantity demanded / percentage change in income = -2% / +5% = -0.4. A negative income elasticity means demand falls as income rises, which defines an inferior good. The value -2.5 comes from inverting the calculation.
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