A 10 percent increase in income has caused a 5 percent decrease in the quantity demanded. The income elasticity is

A 10 percent increase in income has caused a 5 percent decrease in the quantity demanded. The income elasticity is

• A. 0.5
• B. -2.0
• C. -0.5
• D. 2.0

Answer: (C)

Income elasticity of demand measures how much the quantity demanded changes in response to a change in income. It is computed as the percentage change in quantity demanded divided by the percentage change in income: Ey = (%ΔQd) / (%ΔY). Here, income increases by 10 percent, while the quantity demanded falls by 5 percent. So Ey = (-5%) / (10%) = -0.5. The negative sign shows the good is inferior (demand falls as income rises), and the magnitude 0.5 indicates the response is inelastic (the quantity doesn’t change a lot with income). Why this fits the data: a -0.5 elasticity means a 1% rise in income would lead to about a 0.5% fall in quantity demanded, which matches the observed 10% income increase and 5% drop. The other values would imply different directions or much larger responses than what the data show.

Income elasticity of demand measures how much the quantity demanded changes in response to a change in income. It is computed as the percentage change in quantity demanded divided by the percentage change in income: Ey = (%ΔQd) / (%ΔY).

Here, income increases by 10 percent, while the quantity demanded falls by 5 percent. So Ey = (-5%) / (10%) = -0.5. The negative sign shows the good is inferior (demand falls as income rises), and the magnitude 0.5 indicates the response is inelastic (the quantity doesn’t change a lot with income).

Why this fits the data: a -0.5 elasticity means a 1% rise in income would lead to about a 0.5% fall in quantity demanded, which matches the observed 10% income increase and 5% drop. The other values would imply different directions or much larger responses than what the data show.