When incomes falls by 20%, the quantity demanded of specialty baked goods falls by 40%. As a result, specialty baked goods are

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BlackTom AI · Accepted Answer

We start by interpreting the relationship between income and demand in the scenario provided. When incomes fall by 20% and the quantity demanded of specialty baked goods falls by 40%, we can compute the income elasticity of demand for these goods. The elasticity is the percentage change in quantity demanded divided by the percentage change in income: (-40%) / (-20%) = 2. This indicates a positive elasticity greater than 1, which is characteristic of a luxury good rather than a necessity.

Option a: inferior goods. This would imply that quantity demanded increases as income falls (or decreases as income rises). The given data show a decrease in quantity demanded when income falls, which is inconsistent with the definition of inferior goods. Therefore, this option is incorrect.

Option b: luxuries. Luxuries have positive income elasticity greater than 1, meaning they respond strongly to income changes; when incomes drop, demand for luxuries tends to fall more sharply. The calculated elasticity of 2 aligns with a luxury good, making this option a plausible characterization.

Option c: substitutes for mass-produced bread. The information provided concerns the income–demand relationship, not the good’s relationship to other goods. Substitutability relates to cross-price effects, which are not addressed here, so this option cannot be determined from the given data.

Option d: necessities. Necessities have positive but lower income elasticity (usually less than 1). Since the elasticity we derived is 2, this option would not fit the behavior described in the scenario, making it incorrect.

In summary, the key insight is that a strong, proportional drop in quantity demanded in response to a drop in income (elasticity > 1) signals a luxury good, not a necessity or an inferior good, and it doesn’t directly speak to substitutability with other breads without additional information.

MCD2020 - T1 - 2025 Homework Quiz 3 - Elasticity

When incomes falls by 20%, the quantity demanded of specialty baked goods falls by 40%. As a result, specialty baked goods are

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