Home › CA Foundation › Business Economics › Elasticity of Demand › Real incomes of customers rose by 10%. A dealer'…
Real incomes of customers rose by 10%. A dealer's used-car sales fell from 4,000 to 3,850 units. The income elasticity of demand for used cars is:
A-0.375, indicating an inferior good
B+0.375, indicating a normal good
C-2.667, indicating a luxury good
D+3.750, indicating a necessity
Answer & Solution
Correct answer: A. -0.375, indicating an inferior good
1. Change in quantity = $3850-4000 = -150$ units on a base of 4000.
2. % change in quantity = $\dfrac{-150}{4000}\times100 = -3.75\%$.
3. Use $E_i = \dfrac{-3.75\%}{10\%} = -0.375$.
4. A negative income elasticity means used cars are an inferior good.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit I "Law of Demand and Elasticity of Demand", p.31_
Related questions
Using the Point method on a straight-line demand curve AB, elasticity at point P is given Under the Total Outlay method, demand is said to be unitary elastic when:Which of the following is NOT one of the four methods of measuring elasticity of demand liCross elasticity of demand (Ec) measures:Income elasticity of demand (Ey) is defined as:If proportionate change in demand equals proportionate change in price, the demand is:If a small change in price produces a much larger proportionate change in demand, the demaIf the price of a good changes and demand does not change at all, the price elasticity of