Question

Ito et al (1989) estimate that the income elasticity for rice in Japan is -0.71. Provide an economic interpretation for the value of the income elasticity. In addition, say if vice is normal, neutral or inferior.

Answer 1

Formula:

Income elasticity of X = % change in quantity demand of X / 5 change in Income

Income elasticity for rice in Japan = -0.71

This is interpreted as follows:

Increase in income of japan by 15 will result in decrease in demand of rice in Japan by 0.71%.

A good is a normal good if increase in Income resulted in increase in demand , Also a good is an inferior good if increase in Income resulted in decrease in demand and a good is a neutral if increase in Income resulted in no change in demand

As we can see from above that increase in Income resulted in decrease in demand of rice. Hence Rice is an Inferior Good