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CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply

A household's monthly income rises from ₹40,000 to ₹50,000, and its monthly purchase of pulses rises from 10 kg to 11 kg. Calculating percentages on the original values, what is the income elasticity of demand for pulses, and how is pulses classified?

The income elasticity is 0.4 and pulses are a normal good that is a necessity. Income rises 25 per cent while quantity rises 10 per cent, giving 10 divided by 25. A positive value below one indicates a necessity, not an inferior good.

  1. A0.4, a normal good that is a necessityCorrect
  2. B2.5, a luxury good
  3. C0.4, an inferior good
  4. D1.0, a good with unitary income elasticity

Explanation

Income change = 10,000/40,000 = 25%. Quantity change = 1/10 = 10%. Income elasticity = 10/25 = 0.4. It is positive but below one, so pulses are a normal good and a necessity. Calling it inferior is wrong because that needs a negative elasticity; 2.5 inverts the ratio.

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