ACCA Applied Knowledge · Business and Technology · Microeconomic factors
When household incomes rise by 5%, demand for a company's premium chocolate rises by 9%, while demand for its basic own-brand biscuits falls by 2%. Which of the following correctly describes the income elasticity of demand for these products?
Chocolate has income elasticity of +1.8, so it is income elastic, a luxury. Biscuits have -0.4, which is negative, so they are an inferior good. Each figure is the percentage change in demand divided by the 5 percent change in income.
- AChocolate +1.8 (a luxury, income elastic); biscuits -0.4 (an inferior good)Correct
- BChocolate +0.56 (a necessity); biscuits -0.4 (an inferior good)
- CChocolate +1.8 (a luxury, income elastic); biscuits +0.4 (a normal good)
- DChocolate +4.5 (a luxury, income elastic); biscuits -2.5 (an inferior good)
Explanation
Chocolate: 9%/5% = +1.8, above 1 so income elastic (luxury). Biscuits: -2%/5% = -0.4, negative so an inferior good. The second option inverts the ratio for chocolate; the third ignores the sign for biscuits.
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