Question

Income effects depend on the income elasticity of demand for each good that you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true of the income elasticity of the other good you buy?

Short answer

The other good will be a normal good as it will have a positive income elasticity.

Step-by-step solution

Step 1. Introduction:

Income elasticity is the ratio of change in quantity demanded to income change. When the level of income changes, the quantity demanded of a good also changes.

Step 2. Explanation:

An inferior good is a good the demand for which decreases as the level of income increases or the demand for which increases as the level of income falls. A rise in income can cause consumption of one commodity to fall and the consumption of another commodity to rise. When people's income goes up, they cut back on a commodity since they can now purchase the more expensive options that they desire. On the other hand, the income elasticity is positive for the other commodity because its demand rises along with an increase in the income.