Consumers' real incomes rise by 4% and demand for a product falls by 2%. What is the income elasticity of demand and how is the product classified?

Correct answer: C) -0.5, an inferior good

Explanation

Income elasticity = % change in quantity demanded / % change in income = -2% / +4% = -0.5. A negative income elasticity indicates an inferior good. Ignoring the sign gives +0.5 and the wrong 'necessity' label, and classifying -0.5 as a necessity confuses the size of the value (below 1) with its sign; dividing income change by quantity change gives -2.0.