Data collected from the economy of Pokerville reveals that an 18% decrease in income leads to the following changes: • A 6% decrease in the quantity of chips demanded • A 17% increase in the quantity of clubs demanded • A 29% decrease in the quantity of houses demanded Compute the income elasticity of demand for each good and use the dropdown menus to complete the first column in the following table. Then, based on its income elasticity, indicate whether each good is a normal good or an inferior good. (Hint: Be careful to keep track of the direction of change. The sign of the income elasticity of demand can be positive or negative, and the sign confers important information.) Good Income Elasticity of Demand Normal or Inferior Good Chips Clubs Houses Which of the following three goods is most likely to be classified as a luxury good? Clubs Houses Chips

Normal Goods : Chips, Houses Inferior Goods : Clubs Luxury Good : Houses

Explanation:

Income Elasticity Formula = Percentage change in Demand

Percentage change in Income

Percentage Change in Income = - 18%

Chips Income Elasticity = %ΔQ / %ΔY

= - 6/-18 = 0.33

Clubs Income Elasticity = %ΔQ / %ΔY

= + 17/-18 = - 0.94

Houses Income Elasticity = %ΔQ / %ΔY

= - 29/-18 = 1.61

Normal Goods demand are positively related to income, income rise - demand rise & income fall - demand fall. Income Elasticity is hence positive in this case. Inferior Goods demand are negatively related to income, income rise - demand fall & income fall - demand rise. Income Elasticity is hence negative in this case. Luxury goods demand is positive, more income elastic (i. e responds more to income change). Income elasticity is positive, greater than one in this case.

Chips & Houses have positive income elasticities, they are Normal Goods. Clubs have negative income elasticity, they are Inferior goods.

Houses demand is more income elastic i. e > 1. So, its a luxury good