Question

Which of the following statements relating to income elasticity is true?


A positive value for the income elasticity coefficient indicates an inferior good.

Option A,A positive value for the income elasticity coefficient indicates an inferior good.

a

If good X and good Y have negative income elasticities, then both goods are substitutes.

Option B,If good X and good Y have negative income elasticities, then both goods are substitutes.

b

With an income elasticity coefficient of 0.6, the demand is inelastic and the good is an inferior good.

Option C,With an income elasticity coefficient of 0.6, the demand is inelastic and the good is an inferior good.

c

With an income elasticity coefficient of 5, a 10 percent increase in income will lead to a 50 percent increase in the quantity demanded of the good.

Option D,With an income elasticity coefficient of 5, a 10 percent increase in income will lead to a 50 percent increase in the quantity demanded of the good.

d

With an income elasticity coefficient of -1.2
, a 10 percent increase in income will lead to a 12 percent decrease in the price of the good.

Answer 1

Only Option D is true.

Brief explanations:
- A: False. A positive income elasticity indicates a normal (not inferior) good.
- B: False. Negative income elasticities mean both goods are inferior, not that they are substitutes; substitutability is determined by cross-price elasticity.
- C: False. 0.6 is income-inelastic but positive, so the good is normal (not inferior).
- D: True. Income elasticity = 5 means %ΔQ = 5 × %ΔIncome, so a 10% income rise → 50% increase in quantity demanded.
- E: False. Income elasticity describes quantity response to income, not price; it would imply quantity falls by 12%, not the price.