Question

The own-price elasticity of demand for hospital services in the area equals –0.25, the income elasticity of demand equals 0.45, the cross-price elasticity demand for hospital services with respect to the price of nursing home services equals –0.1, and the elasticity of travel time equals –0.37. Use this information to answer the following question.

Hospital services are an inferior good.

True or false?

Answer 1

Income elasticity of demand is the ratio of the percentage change in the quantity demanded of hospitals to the percentage change in the income. As the income elasticity of demand is 0.45, this means as the income increases, demand for hospitals also increases and vice versa.

Inferior goods are the goods whose demand decreases when the income of the consumer increases. In the case of hospitals, we can see that as demand for hospitals increases as the income increases. So we can say that hospital services are not an inferior good. So we can say we can say that that the statement “ Hospital services are an inferior good” is false.