Which of the following goods is most likely to be classified as a luxury good?

• A. Basic bread
• B. Designer handbags
• C. Tap water

Answer: (B)

Verified step by step guidance

1. Understand the definition of a luxury good: A luxury good is a type of normal good for which demand increases more than proportionally as income rises. In other words, when consumers' income goes up, they spend a higher percentage of that additional income on luxury goods compared to necessities.
2. Identify the characteristics of the goods listed: Basic bread and tap water are generally considered necessities because they are essential for daily living and their demand does not increase significantly with income. Designer handbags, on the other hand, are non-essential items often associated with higher income levels and status.
3. Recall the concept of income elasticity of demand, which measures how the quantity demanded of a good responds to a change in consumer income. Luxury goods have an income elasticity greater than 1, meaning demand increases more than proportionally as income rises.
4. Compare the goods based on income elasticity: Basic bread and tap water typically have income elasticities close to zero or less than 1, indicating they are necessities. Designer handbags have a high income elasticity, classifying them as luxury goods.
5. Conclude that among the options, designer handbags are most likely to be classified as a luxury good because their demand increases significantly as consumer income increases, unlike basic bread or tap water.