Home › CA Foundation › Business Economics › Law of Demand and 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
If two goods are perfect substitutes for each other, the cross-price elasticity of demand A positive cross-price elasticity of demand between two goods indicates that the goods areSugar is priced at Rs 50 with 10 kg demanded. When the price of tea falls from Rs 30 to RsTea is priced at Rs 30 with 5 kg demanded. When the price of coffee rises from Rs 25 to RsThe cross-price elasticity between goods X and Y is -0.8. If the price of Y rises by 20%, When the price of brand Imperial rises by 10%, the demand for brand Royal rises by 15%. ThIf the proportion of a consumer's income spent on a good increases as income increases, thWhen a household's income rises by 5%, the demand for bajra falls by 2%. The income elasti