📚 Learning Guide
Elasticity Formulas and Relationships
hard

If the income elasticity of demand for a good is equal to 1 and the price elasticity of demand is unit elastic, what does this imply about the good when income increases?

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Choose the Best Answer

A

The quantity demanded will increase proportionately with income.

B

The good is a luxury good.

C

The good will have no change in quantity demanded.

D

The demand for the good will decrease.

Understanding the Answer

Let's break down why this is correct

Answer

If the income elasticity of demand for a good is equal to 1, it means that when people's income increases by a certain percentage, the quantity demanded for that good also increases by the same percentage. This shows that the good is a normal good, which people buy more of as they have more money. When the price elasticity of demand is unit elastic, it indicates that changes in price will lead to proportional changes in the quantity demanded. For example, if the price of the good goes up by 10%, the quantity demanded will decrease by 10%. Together, these elasticities suggest that as income rises, the demand for the good increases at the same rate, making it a good that people will continue to buy even if its price changes.

Detailed Explanation

When income goes up, the amount people want to buy also goes up by the same percentage. Other options are incorrect because Some might think a good is a luxury just because it has a high demand; It's a common mistake to think that demand stays the same when income rises.

Key Concepts

income elasticity of demand
unit elastic demand
formula for price elasticity
Topic

Elasticity Formulas and Relationships

Difficulty

hard level question

Cognitive Level

understand

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