Income elasticity of demand measures how the quantity demanded of a good responds to what change?

• A. A change in the price of the good
• B. A change in consumers' income
• C. A change in the price of a related good (a substitute or complement)
• D. A change in production costs that shifts the supply curve

Answer: (B)

Verified step by step guidance

1. Understand the definition of income elasticity of demand: it measures the responsiveness of the quantity demanded of a good to changes in consumers' income.
2. Recall that elasticity generally measures the percentage change in quantity demanded divided by the percentage change in some economic variable.
3. For income elasticity of demand, the relevant variable is consumers' income, not the price of the good or prices of related goods.
4. Formally, income elasticity of demand is calculated as \(\frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}\).
5. Therefore, income elasticity of demand specifically captures how quantity demanded changes when consumers' income changes, distinguishing it from price elasticity or cross-price elasticity.