Question

The value of income elasticity of demand ($\eta_i$) for a Luxury commodity is:

• A. $\eta_i > 1$
• B. $0 < \eta_i < 1$
• C. $\eta_i = 0$
• D. $\eta_i < 0$

Hint:

Luxury commodities have highly income-sensitive demand. A simple rule of thumb: if a 10% increase in income leads to a greater than 10% increase in the quantity demanded, the item is classified as a luxury ($\eta_i > 1$).

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
Income elasticity of demand measures the degree of responsiveness of the quantity demanded of a good to a change in the consumer's income.
This microeconomic measure classifies goods into different categories depending on how consumers adjust their consumption when their purchasing power changes.

Step 2: Key Formula or Approach:
The formula for calculating the income elasticity of demand ($\eta_i$) is expressed as: \[ \eta_i = \frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Income}} \]

Step 3: Detailed Explanation:
Let us review the standard values of income elasticity:
For inferior goods, the income elasticity of demand is negative ($\eta_i < 0$), as consumption decreases when income increases.
For essential or necessity goods, the income elasticity of demand is positive but low ($0 < \eta_i < 1$), meaning consumption increases at a rate lower than the rate of income growth.
For luxury goods, the income elasticity of demand is greater than one ($\eta_i > 1$).
As consumers' income rises, they allocate a progressively higher percentage of their overall expenditure to luxury commodities.
This results in a disproportionately larger increase in the quantity demanded of these goods relative to the percentage change in income.
Hence, the income elasticity coefficient is always greater than one for a luxury commodity.

Step 4: Final Answer:
The value of income elasticity of demand for a luxury commodity is $\eta_i > 1$.