An income elasticity of demand of 0.5 indicates the good is

• A. inferior.
• B. luxury.
• C. normal but a necessity.
• D. normal but a luxury.

Answer: (C)

Income elasticity of demand tells us how much quantity demanded changes as income changes. A positive value means the good is normal, while a negative value would indicate an inferior good. The size of the value distinguishes necessities from luxuries: an elasticity between 0 and 1 signals a necessity, since demand rises with income but less than proportionally.

An elasticity of 0.5 means quantity demanded increases when income rises, but only modestly—by about half the percentage change in income. That characterizes a normal good that is a necessity, not a luxury. It’s not inferior (that would have a negative elasticity) and not a luxury (that would have elasticity greater than 1).