From the information in the following table, calculate the income elasticity of demand for this good if income increases from $10,000 to $20,000, and if income increases from $40,000 to $50,000.
|
Income
|
Quality demanded
|
|
$10,000
|
50
|
|
$20,000
|
60
|
|
$30,000
|
80
|
|
$40,000
|
110
|
|
450,000
|
170
|
1. Is this a normal good or an inferior good? How can you tell?
2. Does the proportion of household income spent on this good increase or decrease as income increases?
3. Is this good considered an economic luxury, an economic necessity or neither? Why?
4. How are the word necessity and luxury used differently in economics than in every day speech? A recent study of Murray, Gividaraj and Musgrove (1994) estimated a GDP-health expenditure elasticity of 1.47, implying that medical care is a luxury good. Would this finding be in line with the hypothesis that countries with higher per capital incomes will spend a greater percentage of income on medical care?