CA Foundation P4 · Chapter 2 · Question 7 of 15
A household's income rises from Rs. 20,000 to Rs. 25,000 per month and its consumption of coarse grain falls from 50 kg to 45 kg. The income elasticity of demand (original base) and the nature of the good are:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) -0.4; inferior good
Explanation
Percentage change in quantity = (45 - 50)/50 x 100 = -10%. Percentage change in income = (25,000 - 20,000)/20,000 x 100 = +25%. Income elasticity = -10 / 25 = -0.4. A negative income elasticity indicates an inferior good. -2.5 results from inverting the ratio.
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