What Does It Tell You If the Income Elasticity for Your

question 8

Multiple Choice

What does it tell you if the income elasticity for your product is -0.5?

• A) The product is inferior and an increase in income by 10% reduces demand by 5%.
• B) The product is inferior and an increase in income by 10% increases demand by 50%.
• C) The product is normal and an increase in income by 10% reduces demand by 5%.
• D) The product is normal and an increase in income by 10% increases demand by 50%.

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Definitions:

Consumer Surplus

The difference between the total amount that consumers are willing to pay for a good or service and the total amount they actually pay.

Producer Surplus

The difference between what producers are willing to accept for a good or service versus what they actually receive.

Equilibrium

A state of balance in a market or economy where supply equals demand, with no external influences causing disruption.

Market

Any structure that allows buyers and sellers to exchange any type of goods, services, and information.