Question

Suppose that Theresa's income elasticity for bagels is -0.2.Does the value of Theresa's income elasticity indicate that bagels are normal goods, inferior goods, substitutes, or complements?

Answer 1

An income elasticity of -0.2 means bagels are an inferior good: as Theresa's income rises, her quantity demanded of bagels falls (a 1% rise in income → a 0.2% drop in demand). Substitutes and complements are identified by cross-price elasticities, not income elasticity.