A 10 percent increase in income leads to a 15% decrease in the quantity of macaroni and cheese demanded but no change in the price of macaroni and cheese. From this information, we can assume:
o macaroni is a normal good and price elasticity of demand is greater than 1. macaroni is an inferior good and price elasticity of supply is equal to zero macaroni is an inferior good and price elasticity of supply is infinite. macaroni is an inferior good and price elasticity of demand is less than
The Correct Answer and Explanation is :
Correct Answer:
Macaroni and cheese is an inferior good, and the price elasticity of demand is less than 0.
Explanation:
To analyze this scenario, let’s break it down step by step:
- Income Elasticity of Demand Interpretation:
- A 10% increase in income leads to a 15% decrease in the quantity demanded of macaroni and cheese.
- The formula for income elasticity of demand (( E_I )) is:
[
E_I = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in income}}
]
[
E_I = \frac{-15\%}{10\%} = -1.5
] - Since the income elasticity is negative, this indicates that macaroni and cheese is an inferior good (demand decreases as income rises).
- Price Elasticity of Demand Consideration:
- Price elasticity of demand (( E_D )) measures how quantity demanded responds to a change in price.
- However, in this case, there is no change in price; only income changes.
- This means we cannot determine price elasticity of demand directly from the given data.
- Eliminating Incorrect Options:
- The first option (normal good) is incorrect because a normal good would have a positive income elasticity.
- The second and third options mention price elasticity of supply, but the problem gives no information about supply, so they are irrelevant.
- The last option states macaroni and cheese is an inferior good and price elasticity of demand is less than 0, which is accurate because we confirmed it is an inferior good.
Thus, the correct answer is that macaroni and cheese is an inferior good, and the price elasticity of demand is less than 0.