Question : Income elasticity of demand measures the responsiveness of quantity demanded to changes in:
Option 1: Price.
Option 2: Income.
Option 3: Population.
Option 4: Advertising expenditure.
Correct Answer: Income.
Solution : The correct answer is (b) Income.
Income elasticity of demand measures how the quantity demanded of a good or service responds to changes in income. It measures the percentage change in quantity demanded divided by the percentage change in income.
When income increases, the demand for certain goods may increase as well, indicating a positive income elasticity of demand. On the other hand, for some goods, an increase in income may lead to a decrease in demand, indicating a negative income elasticity of demand. The magnitude of the income elasticity of demand can provide insights into the income sensitivity of a particular good or service.
