CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply
When the income of a household rises by 10%, its quantity demanded of branded packaged atta rises by only 4%. The income elasticity of demand is 0.4. The product is best classified as:
The product is a normal good that is a necessity. Income elasticity is 4 percent divided by 10 percent, which is 0.4. A positive value shows demand rises with income, and a value below one shows it rises less than proportionately, which is typical of necessities.
- AAn inferior good
- BA Giffen good
- CA luxury good
- DA normal good that is a necessityCorrect
Explanation
Income elasticity is 4/10 = 0.4, which is positive, so the good is normal. A value between 0 and 1 means demand rises less than proportionately to income, which is characteristic of necessities. Inferior goods have negative income elasticity and luxuries have values above one.
Did you get it right without looking?
One question tells you little. A timed set on Theory of Demand and Supply shows your real accuracy, how long you take and where you lose marks.
More Theory of Demand and Supply questions
- The demand function for a product is Q = 120 − 4P, where Q is quantity demanded in units and P is price in rupees. If price falls from ₹10 t…
- Which one of the following will cause an expansion (extension) of quantity demanded of scooters, as distinct from an increase in demand?
- Initially the demand for a product is Qd = 100 - 2P. Following a successful advertising campaign, demand becomes Qd = 120 - 2P. At a price o…
- Which of the following would, by itself, lead to a fall in the equilibrium price of wheat flour with equilibrium quantity rising?
- Which one of the following events would cause a leftward shift of the demand curve for branded cooking oil, i.e. a decrease in demand, rathe…
- Bread and butter are complementary goods. If the price of butter rises, which result follows for bread, assuming no other change?