Assume that consumers in Newtown experience an increase in income of 5 percent. If the quantity demanded of the triple waffles at Picasso’s Gelato ice-creamery decreases by 10 percent, this is consistent with:Group of answer choicesTriple waffles being a normal good and having an income elasticity of demand equal to 2.Triple waffles being a normal good and having an income elasticity of demand equal to 0.5.Triple waffles being an inferior good and having an income elasticity of demand equal to 2.Triple waffles being an inferior good and having an income elasticity of demand equal to 0.5.None of the statements in this list apply.
Question
Assume that consumers in Newtown experience an increase in income of 5 percent. If the quantity demanded of the triple waffles at Picasso’s Gelato ice-creamery decreases by 10 percent, this is consistent with:Group of answer choicesTriple waffles being a normal good and having an income elasticity of demand equal to 2.Triple waffles being a normal good and having an income elasticity of demand equal to 0.5.Triple waffles being an inferior good and having an income elasticity of demand equal to 2.Triple waffles being an inferior good and having an income elasticity of demand equal to 0.5.None of the statements in this list apply.
Solution
The correct answer is: Triple waffles being an inferior good and having an income elasticity of demand equal to 2.
The income elasticity of demand measures how the quantity demanded of a good responds to a change in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. In this case, the quantity demanded of triple waffles decreases by 10 percent when income increases by 5 percent, so the income elasticity of demand is -10/5 = -2.
A negative income elasticity of demand indicates that the good is an inferior good, meaning that demand for the good decreases when income increases. So, triple waffles are an inferior good in this scenario. The magnitude of the income elasticity of demand (2) indicates that the quantity demanded is very responsive to changes in income.
Similar Questions
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