Income elasticity of demand measures how:

• A. the quantity demanded of a good responds to changes in the price of a related good
• B. the quantity demanded of a good responds to changes in its own price
• C. the quantity demanded of a good responds to changes in consumer income
• D. the price of a good responds to changes in consumer income

Answer: (C)

Verified step by step guidance

1. Understand that income elasticity of demand measures the responsiveness of the quantity demanded of a good to changes in consumer income.
2. Recall the formula for income elasticity of demand: \(E_I = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}\).
3. Recognize that this elasticity tells us how much the quantity demanded will increase or decrease when consumer income changes, holding other factors constant.
4. Differentiate income elasticity from other elasticities, such as price elasticity of demand (which relates to changes in the good's own price) and cross-price elasticity (which relates to changes in the price of related goods).
5. Conclude that the correct interpretation of income elasticity of demand is how the quantity demanded of a good responds to changes in consumer income.