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CSEET · Economic and Business Environment · Basics of Demand and Supply and Forms of Market Competition

Monthly income of a household rises from Rs 40,000 to Rs 50,000, and its monthly purchase of packaged fruit juice falls from 20 litres to 16 litres. Using original values as base, the income elasticity of demand and the nature of the good are:

Income elasticity is minus 0.8 and the good is inferior. Income rose 25 percent while quantity bought fell 20 percent, giving minus 20 divided by 25, or minus 0.8. A negative income elasticity shows that consumption falls as income rises, which defines an inferior good.

  1. A-0.8, an inferior goodCorrect
  2. B+0.8, a normal necessity
  3. C-0.8, a normal luxury
  4. D-1.25, an inferior good

Explanation

Income change = 10,000/40,000 = 25%. Quantity change = -4/20 = -20%. Income elasticity = -20/25 = -0.8. A negative sign means demand falls as income rises, so the good is inferior. -1.25 inverts the ratio.

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