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When a household's income rises by 5%, the demand for bajra falls by 2%. The income elasticity of demand for bajra is:
A+2.5, so bajra is a necessity good
B+0.4, so bajra is a normal good
C-2.5, so bajra is a luxury good
D-0.4, so bajra is an inferior good
Answer & Solution
Correct answer: D. -0.4, so bajra is an inferior good
1. Use $E_i = \dfrac{\%\ \text{change in demand}}{\%\ \text{change in income}}$.
2. Demand falls, so % change in demand is $-2\%$; income change is $+5\%$.
3. Substitute: $E_i = \dfrac{-2\%}{5\%} = -0.4$.
4. A negative income elasticity means the good is inferior, so bajra is an inferior 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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