Answer to Question #24317 in Economics of Enterprise for abbas

Question

Explain whether the following goods and services would have a positive, negative, or
near-zero income elasticity of demand (i.e., normal or inferior goods), and the magnitude
of the income elasticity of demand (for example: greater than1 (“income elastic”), or less
than 1 (“income inelastic”)), and explain your reasons.
a. Cars
b. MBTA
c. Eating at the restaurant

Answer 1

• A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the demand and may lead to changes to more luxurious substitutes.
• A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in demand. If income elasticity of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good.
• A zero income elasticity (or inelastic) demand occurs when an increase in income is not associated with a change in the demand of a good. These would be sticky goods.
a. Cars
Cars are normal goods and have positive income elasticity. So, you spend more money on cars, if your income rises. They may be either luxury, or superior goods.
b. MBTA
MBTA are normal goods and have positive income elasticity. So, spend more money on MBTA, if your income rises.
c. Eating at the restaurant
It is normal good and has positive income elasticity. So, you spend more money on the eating in the restaurant, if your income rises. It also may be either luxury, or superior good.