Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Demand decreases as income increases
B
Demand increases by 2% for every 1% increase in income
C
Demand remains unchanged as income changes
D
Demand increases by 1% for every 2% increase in income
Understanding the Answer
Let's break down why this is correct
Answer
If the income elasticity of demand for a good is 2, it means that the demand for that good increases significantly when people's income rises. Specifically, for every 1% increase in income, the demand for the good increases by 2%. This indicates that the good is a luxury item, as people tend to buy more of it when they have more money to spend. For example, if someone's income goes up from $50,000 to $51,000, their demand for this good would rise by 2%, showing that they are likely to buy more of it because they can afford to. This strong relationship highlights how sensitive the demand for this good is to changes in income.
Detailed Explanation
An elasticity of 2 means that for every 1% increase in income, the demand for the good goes up by 2%. Other options are incorrect because This answer suggests that demand goes down when income goes up; This option implies that demand does not change with income.
Key Concepts
income elasticity of demand
Topic
Elasticity in Market Dynamics
Difficulty
easy level question
Cognitive Level
understand
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