Income Elasticity Measures Demand Response to Income Changes

Steps:

• Define income elasticity of demand as the percentage change in quantity demanded divided by percentage change in income.
• Identify that a negative value indicates quantity demanded decreases as income rises.
• Classify goods: normal goods have positive elasticity; inferior goods have negative.
• Conclude that negative elasticity applies only to inferior goods.

Why D is correct:

• Inferior goods are defined by negative income elasticity, where higher income leads consumers to switch to better alternatives.

Why the others are wrong:

• A: Luxury goods have positive elasticity greater than 1, showing demand rises more than proportionally with income.
• B: Necessity goods have positive elasticity between 0 and 1, with demand increasing but less than proportionally.
• C: Normal goods have positive elasticity overall, encompassing both necessities and luxuries.

Final answer: D