If the income elasticity of demand for a good is greater than 1, the good is a

• A. Luxury
• B. Inferior
• C. Normal but not luxury
• D. Necessity

Answer: (A)

Income elasticity of demand measures how much quantity demanded responds to a change in income. When this elasticity is greater than one, a rise in income leads to a more-than-proportional increase in the quantity demanded, so the good is treated as a luxury rather than a necessity. Luxuries are things people buy more of as their income grows, but they wouldn’t be bought in the same way if income were flat or falling. Inferior goods have negative elasticity, and normal goods with elasticity between 0 and 1 are considered normal but not luxury, with demand rising less than proportionally with income. That’s why a value above 1 clearly points to a luxury good.