alleryThe income of a household rises by 10% and the demand for a TV rises by 20%. The income elasticity of demand for the TV is:
A2 (luxury good)
B0.5 (necessity)
C-2 (inferior good)
D1 (unitary)
Answer & Solution
Correct answer: A. 2 (luxury good)
1. Use $E_i = \dfrac{\%\ \text{change in demand}}{\%\ \text{change in income}}$.
2. Substitute: $E_i = \dfrac{20\%}{10\%}$.
3. This equals 2.
4. Since $E_i > 1$, the TV is a luxury good.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit I "Law of Demand and Elasticity of Demand", p.30_
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