What is the practical significance of income elasticity coefficients? Explain the significance using the examples: an income elasticity of 3.0 for automobiles and an income elasticity of 0.20 for home-cooked meals.

The practical significance of the income elasticity of demand is the determination of whether the good in question is an inferior or a normal good. A normal good has a positive income elasticity of demand and an inferior good has a negative income elasticity of demand.

In addition, we can use the income elasticity of demand to differentiate between necessity goods and luxury goods. Necessity goods have a positive income elasticity of demand which is less than 1 and luxury goods have a positive income elasticity of demand which is greater than 1.

For example, income elasticity of demand for automobiles equal to +3.0 indicates that automobiles are normal goods which is a luxury and income elasticity of demand for home-cooked meals equal to +0.2 indicates that home-cooked meal is normal goods which is a necessity.