CAPF AC 2025 Q11: Indian Economy – Microeconomics & Market Concepts
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.
- (a) 1 and 3 only
- (b) 2 and 3 only
- (c) 1 and 2 only
- (d) 1, 2 and 3
Answer: (c) 1 and 2 only
Explanation
Income elasticity of demand
How to think: income elasticity = % change in quantity demanded ÷ % change in income.
Its sign and size tell the type of good.
| Good | Income elasticity | Given in the question | Verdict |
|---|---|---|---|
| 1. Necessity | Between 0 and 1 (demand rises less than income) | Between 0 and 1 | Correct |
| 2. Luxury | More than 1 (demand rises more than income) | More than 1 | Correct |
| 3. Inferior | Less than 0 (demand falls as income rises) | More than 0 | Wrong |
An inferior good has a negative income elasticity, for example low-quality grain or local bus travel as income grows.
Answer: (c) 1 and 2 only.
Why each option is right or wrong
- (a) Incorrect. Pair 3 is wrong: inferior goods have negative income elasticity.
- (b) Incorrect. Pair 1 is right and pair 3 is wrong.
- (c) CORRECT. Necessity (0 to 1) and luxury (above 1) are matched correctly.
- (d) Incorrect. Pair 3 is wrong: inferior goods are below zero.
Key point
Income elasticity: luxury > 1; necessity 0 to 1; normal good > 0; inferior good < 0 (negative).
Remember
Inferior = negative; necessity 0 to 1; luxury above 1.
Common mistakes
- Giving inferior goods a positive elasticity.
- Thinking a necessity has elasticity above 1.
- Forgetting that every normal good has positive elasticity, whether necessity or luxury.
Exam tip
Educated guess: 'inferior' means demand falls when income rises, and a fall needs a negative number. So pair 3 fails, and only (c) leaves it out.
Sources
- N. Gregory Mankiw, Principles of Economics, Chapter 5 (Elasticity and its Application: income elasticity of demand)
- NCERT Class XII Introductory Microeconomics, Chapter 2 (Theory of Consumer Behaviour: normal and inferior goods)