Question : If the income elasticity of demand for a good is greater than 1, it means the good is:
Option 1: A normal good.
Option 2: An inferior good.
Option 3: A luxury good.
Option 4: A substitute good.
Correct Answer: A luxury good.
Solution : The correct answer is (c) A luxury good.
A luxury good is a type of good for which demand increases at a proportionately higher rate than income. When consumers experience an increase in income, they tend to allocate a larger portion of their budget to luxury goods, thereby causing a relatively larger increase in the quantity demanded of those goods.
The income elasticity of demand measures the responsiveness of quantity demanded to changes in income. A positive income elasticity of demand indicates that as income increases, the quantity demanded of the good increases as well. When the income elasticity of demand is greater than 1, it suggests that the good is a luxury good because the increase in quantity demanded is proportionately higher than the increase in income. In other words, consumers are willing to spend a larger share of their income on luxury goods when their income rises.
