Suppose the income elasticity of demand for toys is +2.4. This means that

A) a 4 percent increase in income will increase the purchase of toys by 9.6 percent.
B) a 4 percent increase in income will increase the purchase of toys by 1.67 percent.
C) a 4 percent increase in income will decrease the purchase of toys by 9.6 percent.
D) toys are an inferior good.

Question

T.G.M Finance · Accepted Answer

Final Answer : A, Explanation :  The income elasticity of demand measures how the quantity demanded of a good responds to a change in income, with a positive elasticity indicating that the good is a normal good (demand increases as income increases). Here, an elasticity of +2.4 means that for every 1% increase in income, the demand for toys increases by 2.4%. Therefore, a 4% increase in income leads to a 9.6% increase in the purchase of toys (2.4 * 4 = 9.6).

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