A good whose income elasticity always exceeds 1.0 is typically classified as a

A good whose income elasticity always exceeds 1.0 is typically classified as a

• A. Normal good
• B. Giffen good
• C. Luxury good
• D. Inferior

Answer: (C)

The main idea is how income changes affect how much people buy. Income elasticity of demand measures the responsiveness of quantity demanded to a change in income. If the elasticity is positive, the good is normal; if it’s between 0 and 1, it’s a necessity; if it exceeds 1, demand rises more than in proportion to income, classifying it as a luxury good. When income goes up, people tend to spend a larger share of the extra income on luxury items, so a good with income elasticity over 1.0 grows faster than incomes themselves. That’s why this is labeled a luxury good: demand expands more than proportionally as income increases. By contrast, inferior goods have negative elasticity, and Giffen goods are a special, rare case of an inferior good where the income effect dominates the substitution effect in an unusual way.

The main idea is how income changes affect how much people buy. Income elasticity of demand measures the responsiveness of quantity demanded to a change in income. If the elasticity is positive, the good is normal; if it’s between 0 and 1, it’s a necessity; if it exceeds 1, demand rises more than in proportion to income, classifying it as a luxury good. When income goes up, people tend to spend a larger share of the extra income on luxury items, so a good with income elasticity over 1.0 grows faster than incomes themselves. That’s why this is labeled a luxury good: demand expands more than proportionally as income increases. By contrast, inferior goods have negative elasticity, and Giffen goods are a special, rare case of an inferior good where the income effect dominates the substitution effect in an unusual way.