The income elasticity of demand is high for

• A. shelter.
• B. luxuries.
• C. clothing.
• D. food.

Answer: (B)

Income elasticity of demand tells us how much the quantity demanded changes when income rises or falls. Goods that are considered luxuries have high income elasticity because people spend a larger share of extra income on non-essentials. When incomes go up, demand for luxuries can increase by a larger percentage than the income increase, giving an elasticity greater than one. In contrast, items like food and shelter are basic needs, and clothing is often a basic necessity as well; their demand rises with income but by smaller amounts, so their income elasticities are lower. Therefore, the item with the highest income elasticity is luxuries.