Unique role of income elasticity in classifying goods by consumer response to income changes

Steps:

• Define income elasticity (EY): %ΔQd / %Δincome; positive for normal goods, negative for inferior.
• Define price elasticity (EP): %ΔQd / %Δprice; measures responsiveness to price, not income type.
• Evaluate options: Identify traits exclusive to EY, like good classification, versus shared or EP-specific traits.
• Select option unique to EY: Distinguishes normal/inferior goods via sign of EY.

Why A is correct:

• Income elasticity's sign (positive for normal, negative for inferior) classifies goods by income effect, per economic definition; price elasticity ignores income, focusing on price sensitivity.

Why the others are wrong:

• B: Both elasticities predict quantity changes—EP for price shifts, EY for income shifts.
• C: Price elasticity predicts revenue via total revenue test (elastic demand increases revenue when price falls).
• D: Price elasticity classifies elastic (|EP|>1) vs. inelastic (|EP|<1) demand.

Final answer: A