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Sia

Question
Macroeconomics
Posted 10 months ago

When Pam's income increased by 10%10 \%, her quantity demanded of hotel rooms increased by 5%5 \%.

What kind of good does Pam consider hotel rooms?
Choose 1 answer:
(A) An inferior good
(B) Substitutes for log cabins
(C) A normal necessity
(D) A normal luxury
(E) Complementary with plane tickets
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Answer from Sia
Posted 10 months ago
Solution
a
Income Elasticity of Demand: The income elasticity of demand measures how the quantity demanded of a good responds to a change in income. It is calculated using the formula: Income Elasticity of Demand=% change in quantity demanded% change in income \text{Income Elasticity of Demand} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}
b
Classification of Goods: Based on the income elasticity of demand, goods can be classified as normal or inferior. Normal goods have a positive income elasticity (demand increases as income increases), while inferior goods have a negative income elasticity (demand decreases as income increases). Within normal goods, there are necessities (with income elasticity between 0 and 1) and luxuries (with income elasticity greater than 1)
c
Calculation and Interpretation: Given that Pam's income increased by 10% and her quantity demanded of hotel rooms increased by 5%, we calculate the income elasticity of demand as follows: Income Elasticity of Demand=5%10%=0.5 \text{Income Elasticity of Demand} = \frac{5\%}{10\%} = 0.5 . Since the value is positive and less than 1, hotel rooms are a normal necessity for Pam
Answer
C. A normal necessity
Key Concept
Income Elasticity of Demand
Explanation
The income elasticity of demand for hotel rooms is positive and less than 1, indicating that hotel rooms are a normal necessity for Pam.

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