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, what we can assume ?
The correct answer and explanation is:
The correct answer is that macaroni and cheese is an inferior good.
When the income of consumers increases, they tend to demand less of an inferior good. In this scenario, a 10% increase in income leads to a 15% decrease in the quantity of macaroni and cheese demanded. This behavior aligns with the characteristics of an inferior good, which sees a reduction in demand as income rises, in contrast to normal goods where demand typically increases as income increases.
To further explain, the income elasticity of demand (YED) measures the responsiveness of the quantity demanded of a good to changes in income. It is calculated by the formula: YED=% Change in Quantity Demanded% Change in IncomeYED = \frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Income}}
In this case: YED=−15%+10%=−1.5YED = \frac{-15\%}{+10\%} = -1.5
The negative value indicates that macaroni and cheese is an inferior good. For normal goods, the YED is positive, meaning that as income rises, so does the demand. For inferior goods, however, the YED is negative, showing that as income rises, the demand falls.
In practical terms, people might opt for cheaper alternatives or more premium products when their income increases, and they reduce their consumption of lower-cost, inferior goods. Macaroni and cheese could be considered a staple or a budget food item, and when consumers have more disposable income, they might choose to purchase higher-quality or more expensive food items, thus decreasing their demand for macaroni and cheese.
This scenario highlights an important aspect of consumer behavior, where not all goods react the same way to changes in income. It’s important to distinguish between inferior goods, normal goods, and luxury goods when analyzing market demand.