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.
If the income elasticity of demand for a good is greater than 1, it means that the quantity demanded of the good is highly responsive to changes in income. In other words, as income increases, the demand for the good increases at a proportionately greater rate. Luxury goods are often associated with higher income levels and tend to have income elasticities of demand greater than 1.
Normal goods, in general, have positive income elasticities of demand, indicating that the quantity demanded increases as income increases. However, a normal good can have an income elasticity of demand less than 1 if the demand for the good grows at a slower rate than income.
Inferior goods, on the other hand, have negative income elasticities of demand, meaning that the quantity demanded decreases as income increases. These goods are often lower-quality or less-desirable alternatives and are associated with lower-income households.
Substitute goods are goods that can be used as alternatives to each other. The income elasticity of demand is not directly related to whether a good is a substitute or not.
