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 is a measure of how sensitive the quantity demanded of a good or service is to changes in income. It helps to determine whether a good is a normal good or an inferior good.
If the income elasticity of demand is positive, it indicates that the good is a normal good. A positive income elasticity means that as income increases, the quantity demanded of the good also increases, indicating that it is a normal good.
If the income elasticity of demand is negative, it indicates that the good is an inferior good. A negative income elasticity means that as income increases, the quantity demanded of the good decreases, indicating that it is an inferior good.
Therefore, income elasticity of demand captures the responsiveness of quantity demanded to changes in income.
