The income elasticity of demand for jewelry is 2. Other things equal, a 10 percent increase in consumer income will: A. Decrease the quantity of jewelry purchased by 20 percent B. Increase the quantity of jewelry purchased by 5 percent C. Decrease the quantity of jewelry purchased by 5 percent D Increase the quantity of jewelry purchased by 20 percent
The correct answer and explanation is:
Correct Answer: D. Increase the quantity of jewelry purchased by 20 percent
Explanation:
Income elasticity of demand measures the responsiveness of the quantity demanded of a good to changes in consumer income. It is calculated using the formula:
Income Elasticity of Demand (Ey) = (% Change in Quantity Demanded) / (% Change in Income)
In this case, the income elasticity of demand for jewelry is given as 2. This means that for every 1 percent increase in consumer income, the quantity demanded for jewelry increases by 2 percent.
The question states that there is a 10 percent increase in consumer income. Using the formula, the expected change in quantity demanded is:
% Change in Quantity Demanded = Ey × % Change in Income
= 2 × 10% = 20%
Therefore, the quantity of jewelry demanded will increase by 20 percent when consumer income rises by 10 percent, assuming all other factors remain constant.
Jewelry is considered a luxury good, and luxury goods typically have an income elasticity of demand greater than one. This means that when consumers’ incomes rise, they tend to spend proportionally more on such goods. The higher elasticity reflects that demand for jewelry is highly sensitive to income changes, unlike necessity goods which usually have income elasticities less than one.
This concept is crucial in economics because it helps businesses and policymakers understand consumer behavior. Companies that sell luxury items like jewelry can anticipate higher sales when the economy is growing and incomes are rising. On the other hand, during economic downturns when incomes fall, the demand for luxury goods like jewelry is likely to drop significantly due to their high income elasticity.
In conclusion, since the income elasticity is 2 and income increases by 10 percent, the quantity of jewelry demanded will increase by 20 percent. Hence, the correct choice is D.