Which among the following regarding the nature of goods and income elasticity are correctly matched? Nature of Goods : Income Elasticity 1. Necessity : Between 0 and 1 2. Luxury : More than 1 3. Inferior : More than 0 Select the answer using the code given below.

Correct — C, 1 and 2 only. Income elasticity of demand measures how far the quantity demanded of a good responds to a change in consumer income, and its sign is what classifies the good. A necessity is a normal good whose demand rises with income but by proportionately less, so its income elasticity lies between 0 and 1 — pair 1 is right. A luxury is a normal good whose demand rises faster than income, giving an elasticity greater than 1 — pair 2 is right. An inferior good is defined by demand falling as income rises, so its income elasticity is negative, less than 0. Pair 3 states 'more than 0', which is exactly the wrong side of zero and would make an inferior good a normal one. Two pairs correct, one wrong.

• (a)1 and 3 only — Keeps the inferior-good pair, which is the one wrong entry in the list. Its income elasticity is negative, not positive.
• (b)2 and 3 only — Drops the necessity pair, which is correct: a necessity's demand grows more slowly than income, so its elasticity sits between 0 and 1.
• (d)1, 2 and 3 — Accepts all three, which requires an inferior good to have positive income elasticity — the very property that would stop it being inferior.

Income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income. Its sign splits all goods into two families. Positive elasticity means a normal good, and within that family a value between 0 and 1 marks a necessity while a value above 1 marks a luxury. Negative elasticity means an inferior good, one whose demand shrinks as buyers grow richer and switch to something better. The same good can move between categories as an economy develops, which is why coarse cereals behave as inferior goods in some income brackets and not in others.

The whole item turns on the sign of one number. A candidate who has memorised the words 'necessity, luxury, inferior' without attaching the numbers can be pushed into option (d), because 'more than 0' reads as a harmless-looking range. The discipline is to draw the number line first: negative is inferior, zero to one is necessity, above one is luxury. Note also that this is income elasticity, not price elasticity — a Giffen good is the price-side curiosity and does not belong in this classification.

• Income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income.
• A necessity is a normal good with income elasticity between 0 and 1.
• A luxury is a normal good with income elasticity greater than 1.
• An inferior good has negative income elasticity — demand falls as income rises.
• Zero income elasticity means demand does not respond to income at all.

• Reading 'more than 0' as harmless when the defining property of an inferior good is a negative value.
• Mixing income elasticity with price elasticity, which carries its own sign convention.
• Assuming a good is permanently a necessity or a luxury regardless of the income level considered.

Asked as a match-the-pairs item where two rows are textbook-correct and the third flips the sign of the number that defines the category.

• practice — not a real PYQ

  A good whose demand falls when consumer income rises has income elasticity that is

  • (a)greater than 1
  • (b)between 0 and 1
  • (c)exactly zero
  • (d)negative

  Answer(d) negative — this is the defining property of an inferior good.

• practice — not a real PYQ

  Which value of income elasticity of demand identifies a luxury good?

  • (a)Less than 0
  • (b)Between 0 and 1
  • (c)Exactly 1
  • (d)More than 1

  Answer(d) More than 1 — demand for a luxury rises proportionately faster than income.