To calculate the income elasticity of demand, we use the formula:
Income Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Income)
Given that a 10 percent increase in income leads to a 5 percent decrease in the demand for the good, we can substitute these values into the formula:
Income Elasticity of Demand = (-5%) / (10%) = -0.5
Thus, the income elasticity of demand is -0.5. Since the income elasticity of demand is negative, the good is an inferior good.
Therefore, the correct answer is b. -1/2; an inferior.
If a 10 percent increase in income leads to a 5 percent decrease in the demand for a good,
the income elasticity of demand equals ________ and the good is ________ good.
a. 1/2; a normal
b. -1/2; an inferior
c. 2; a normal
d. -2; a normal
e. -5; an inferior
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