Which of the following statements relating to income elasticity of demand is true?

• A. Luxury goods have an income elasticity of demand less than zero.
• B. Income elasticity of demand measures the responsiveness of quantity demanded to changes in price.
• C. A normal good has a positive income elasticity of demand.
• D. An inferior good has a positive income elasticity of demand.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the definition of income elasticity of demand (YED). It measures the responsiveness of the quantity demanded of a good to a change in consumer income, holding other factors constant. The formula is: \[\text{YED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}\]
2. Step 2: Recall the typical signs of income elasticity for different types of goods: - Normal goods have a positive YED (demand increases as income increases). - Inferior goods have a negative YED (demand decreases as income increases). - Luxury goods are a subset of normal goods with YED greater than 1 (demand increases more than proportionally as income increases).
3. Step 3: Evaluate each statement based on these definitions: - "Luxury goods have an income elasticity of demand less than zero" contradicts the fact that luxury goods have positive YED greater than 1. - "Income elasticity of demand measures responsiveness to price changes" is incorrect because it measures responsiveness to income changes, not price.
4. Step 4: Analyze the remaining statements: - "A normal good has a positive income elasticity of demand" aligns with the definition of normal goods. - "An inferior good has a positive income elasticity of demand" contradicts the definition since inferior goods have negative YED.
5. Step 5: Conclude that the true statement is the one about normal goods having positive income elasticity of demand, based on the standard economic definitions and the formula for YED.