Question

1. using the income elasticity of demand to characterize goods

a survey taken by residents from the imaginary town of flip city tells economists that the following changes result from a 1% rise in income:

• a 30% increase in the quantity of queens demanded
• a 13% decrease in the quantity of aces demanded
• a 12% increase in the quantity of spades demanded

compute the income elasticity of demand for each good and use the dropdown menus to complete the first column in the following table. then, based on the income elasticities, classify each good as either a normal good or an inferior good. (hint: be careful to keep track of the direction of change. the sign of the income elasticity of demand can be positive or negative, and the sign gives important information.)

good	income elasticity of demand	normal good or inferior good
aces
spades

which of the following three goods is most likely to be classified as a luxury good?

• spades
• aces
• queens

Explanation:

Step1: Define income elasticity formula

The income elasticity of demand is calculated as:
$$E_Y = \frac{\% \Delta Q_d}{\% \Delta Y}$$
where $\% \Delta Q_d$ is the percentage change in quantity demanded, and $\% \Delta Y$ is the percentage change in income (17% here, or 0.17 in decimal form).

Step2: Calculate for Queens

Plug in Queens' values:
$$E_Y = \frac{30\%}{17\%} \approx 1.76$$
Positive elasticity means normal good.

Step3: Calculate for Aces

Plug in Aces' values:
$$E_Y = \frac{-13\%}{17\%} \approx -0.76$$
Negative elasticity means inferior good.

Step4: Calculate for Spaids

Plug in Spaids' values:
$$E_Y = \frac{12\%}{17\%} \approx 0.71$$
Positive elasticity means normal good.

Step5: Identify luxury good

Luxury goods have $E_Y > 1$. Queens have the only elasticity greater than 1.

Answer:

Completed Table:

Good	Income Elasticity of Demand	Normal Good or Inferior Good
Aces	$\approx -0.76$	Inferior Good
Spaids	$\approx 0.71$	Normal Good

Luxury Good Answer:

Queens