An income elasticity of demand equal to 1.2 indicates the good is

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

Answer: (C)

Income elasticity of demand shows how much quantity demanded responds to a change in income. A positive value means normal goods, while a negative value indicates inferior goods. The size matters: 0 < YED < 1 describes a necessity (demand rises with income but less than proportionally), and YED > 1 describes a luxury (demand rises more than proportionally with income). With an income elasticity of 1.2, the quantity demanded increases more than proportionally as income grows, which is the hallmark of a luxury good. For example, if income rises by 10%, quantity demanded would rise by about 12%, reflecting its discretionary, luxury nature.