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Data collected from the economy of Pokerville reveals that a 16% increase in income leads to the following changes: An 18% increase in the quantity of horses demanded A 14% decrease in the quantity of spades demanded A 30% increase in the quantity of aces demanded Compute the income elasticity of demand for each of the goods described, and select the appropriate value in the following table
Data collected from the economy of Pokerville reveals that a 16% increase in income leads to the following changes:
An 18% increase in the quantity of horses demanded
A 14% decrease in the quantity of spades demanded
A 30% increase in the quantity of aces demanded
Compute the income elasticity of demand for each of the goods described, and select the appropriate value in the following table. Then indicate whether the income elasticity for each good indicates that it is a normal good or an inferior good. Be careful to keep track of the direction of change.
Which of the following three goods is most likely to be classified a luxury good?
a. Horses
b. Spades
c. Aces
Expert Solution
a. The income elasticity of horses is 18/16 = 1.125, a horse is a normal good since the income elasticity of demand is positive.
b.. The income elasticity of spades is 14/16 = -0.875, a spade is an inferior good since the income elasticity of demand is negative.
c. The income elasticity of aces is 30 /16 = 1.875, aces is a normal good since the income elasticity of demand is positive.
- Horses and Aces are luxuries since their income elasticity of demand is greater than one. However, since the income elasticity of demand for aces is higher than that of horses, the ace is most likely to be classified a luxury good.
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