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Data collected from the imaginary economy of Tralfamadore reveals that a 19% decrease in income leads to the following changes: A 26% decrease in the quantity of welk demanded A 8% increase in the quantity of degdan demanded A 1% decrease in the quantity of lafgar demanded Compute the income elasticity of demand for each of the goods described
Data collected from the imaginary economy of Tralfamadore reveals that a 19% decrease in income leads to the following changes:
A 26% decrease in the quantity of welk demanded
A 8% increase in the quantity of degdan demanded
A 1% decrease in the quantity of lafgar demanded
Compute the income elasticity of demand for each of the goods described. Then indicate whether the income elasticity for each good indicates that it is a normal or an inferior good
a. Welk?
b. Degdan?
c. Lafgar
Which of the following three goods is most likely classified as a luxury good?
Expert Solution
a. The income elasticity of welk is 26/19 = 1.36842, welk is a normal good.
b.. The income elasticity of degdan is 8/19 = .421053, degdan is an inferior good
c. The income elasticity of lafgar is 1/19 = 1/19, lafgar is a normal good.
A luxury good has an inelastic demand, which is an elasticity < 1, and is a normal good. This means that lafgar is a luxury good.
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