The quantity demanded of do-it-yourself hair-cutting sets increases from 3000 to 10,000 when the average income decreases from $60,000 to $40,000.

a. Calculate the elasticity.

b. What type of elasticity is this?

c. Use your answer for part B to answer one of the following questions: If it is elasticity of demand or supply, is it more elastic, more inelastic, or unit elastic? If it is cross price elasticity, are the products compliments or substitutes? If it is income elasticity, is it a luxury, normal, or inferior good?

A. Elasticity

Percentage change in income = (40000 - 60000)/ 60000 * 100 = -33%

Percentage change in demand = (10000 - 3000)/ 3000 * 100 = 233%

Elasticity = Percentage change in demand / Percentage change in income

Elasticity =- 233%/ 33% = -7.07

B. The above elasticity represents income elasticity. Income elasticity represents the responsiveness of quantity demanded of a good due to change in the income level of the consumers.

C. The above income elasticity indicates that the good is an inferior good. The demand of inferior goods tend to increase when there is decrease in the income level and the demand of the good tends to decrease when the income level increases. In case when the income of consumers increases, the consumers will shift their consumption to more luxurious substitutes. The negative income elasticity thus represents that the good is inferior in nature.

b.