Pre-IB Economics Practice Exam

What is income elasticity of demand and what does a value greater than 1 indicate?

Income elasticity measures responsiveness of quantity demanded to income; a value greater than 1 indicates a luxury good. Income elasticity measures responsiveness of quantity supplied to income; a value greater than 1 indicates a luxury good. Income elasticity measures responsiveness of quantity demanded to price; a value greater than 1 indicates elasticity. Income elasticity measures responsiveness of quantity demanded to income; a value greater than 1 indicates a normal good.

Correct Answer:

Income elasticity measures responsiveness of quantity demanded to income; a value greater than 1 indicates a luxury good.

Explanation:

Income elasticity of demand measures how responsive the quantity demanded is to changes in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. When this elasticity exceeds one, the good is a luxury: demand rises more than proportionally as income increases, so higher-income households buy disproportionately more of it. This differs from necessities, where the elasticity is between zero and one, and from inferior goods, which have negative elasticity. It’s also distinct from price elasticity of demand, which looks at responsiveness to price, not income.

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