CA Foundation · Business Economics · Theory of Demand and Supply
When the monthly income of a household rises from ₹40,000 to ₹50,000, its quantity demanded of a good rises from 20 units to 22 units. The income elasticity of demand and the nature of the good are:
The income elasticity is 0.4 and the good is a necessity, which is a normal good. Income rises 25% and quantity demanded rises 10%, so the ratio is 10/25 = 0.4. It is positive but less than one, so demand is income-inelastic.
- A0.4; a necessity (normal good)Correct
- B2.5; a luxury good
- C0.4; an inferior good
- D0.8; a luxury good
Explanation
Percentage change in income = 10,000/40,000 = 25%. Percentage change in quantity = 2/20 = 10%. Income elasticity = 10/25 = 0.4. It is positive, so the good is normal, and being below 1 it is a necessity. Option 2 inverts the ratio.
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