Answer to Question #146856 in Microeconomics for Jan Muhammad

Question

The income elasticities of demand for movies, dental services,
and clothing have been estimated to be +3.4, +1, and +0.5,
respectively. Interpret these coefficients. What does it mean if
an income-elasticity coefficient is negative?

Answer 1

All are normal goods because income and quantity demanded move in the same direction. These coefficients reveal that a 1 percent increase in income will increase the quantity of movies demanded by 3.4 percent, dental services by 1 percent, and clothing by 0.5 percent. A negative coefficient indicates an inferior good—income and quantity demanded move in the opposite direction.