Question : Which of the following factors affects the income elasticity of demand?

Option 1: Availability of substitutes

Option 2: Time period under consideration

Option 3: Proportion of income spent on the good

Option 4: All of the above

Correct Answer: All of the above

Solution : The correct answer is (d) All of the above.

The income elasticity of demand measures the responsiveness of quantity demanded to changes in income. Several factors can influence the income elasticity of demand, including:

a) Availability of substitutes: The availability of substitutes for a good can affect its income elasticity of demand. If there are close substitutes available, consumers may switch to those substitutes when their income changes. In such cases, the income elasticity of demand is likely to be higher, indicating a more significant response of quantity demanded to changes in income.

b) Time period under consideration: The time period under consideration can also impact the income elasticity of demand. In the short run, consumers may have limited options to adjust their consumption patterns in response to changes in income. As a result, the income elasticity of demand may be relatively low. However, in the long run, consumers have more flexibility to adjust their consumption choices, leading to higher income elasticity of demand.

c) Proportion of income spent on the good: The proportion of income that consumers spend on a particular good can influence its income elasticity of demand. For goods that represent a significant portion of a consumer's budget, changes in income will have a more substantial impact on the demand for those goods. As a result, the income elasticity of demand is likely to be higher for goods that represent a larger proportion of income.

Therefore, all of the factors mentioned in options a, b, and c can affect the income elasticity of demand. They influence the extent to which changes in income lead to changes in the quantity demanded of a good.