If the income elasticity of demand for peanut butter is -3, peanut butter is classified as which type of good?

• A. Normal good
• B. Luxury good
• C. Giffen good
• D. Inferior good

Answer: (D)

Verified step by step guidance

1. Recall the definition of income elasticity of demand, which measures how the quantity demanded of a good responds to a change in consumer income. It is calculated as \(\text{Income Elasticity} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}\).
2. Understand the classification of goods based on income elasticity: if the income elasticity is positive, the good is a normal good (demand increases as income increases). If it is negative, the good is an inferior good (demand decreases as income increases).
3. Note that a luxury good is a type of normal good with an income elasticity greater than 1, meaning demand increases more than proportionally as income rises.
4. Recognize that a Giffen good is a special type of inferior good where the demand increases as the price increases, which is unrelated to income elasticity but rather price elasticity and consumer behavior.
5. Since the income elasticity of demand for peanut butter is given as -3 (a negative value), classify peanut butter as an inferior good because demand decreases when income rises.