Suppose the income elasticity of demand for toys is -2.5. This means that

A) a 3 percent increase in income will decrease the purchase of toys by 7.5 percent.
B) a 3 percent increase in income will decrease the purchase of toys by 1.2 percent.
C) a 3 percent increase in income will increase the purchase of toys by 7.5 percent.
D) toys are a normal good.

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molly magill · Accepted Answer

Final Answer : A, Explanation :  The income elasticity of demand indicates how the quantity demanded of a good responds to a change in income. A negative elasticity, like -2.5, means the good is an inferior good, and demand decreases as income increases. A 3% increase in income leads to a 7.5% decrease in demand for toys (3% * -2.5 = -7.5%).

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