A good whose income elasticity always exceeds 1.0 is typically classified as a

• A. Normal good
• B. Giffen good
• C. Luxury good
• D. Inferior

Answer: (C)

The main idea is how income changes affect how much people buy. Income elasticity of demand measures the responsiveness of quantity demanded to a change in income. If the elasticity is positive, the good is normal; if it’s between 0 and 1, it’s a necessity; if it exceeds 1, demand rises more than in proportion to income, classifying it as a luxury good. When income goes up, people tend to spend a larger share of the extra income on luxury items, so a good with income elasticity over 1.0 grows faster than incomes themselves. That’s why this is labeled a luxury good: demand expands more than proportionally as income increases. By contrast, inferior goods have negative elasticity, and Giffen goods are a special, rare case of an inferior good where the income effect dominates the substitution effect in an unusual way.