Income elasticity of demand measures:

a) how responsive quantity demanded is to changes in income.
b) how responsive quantity demanded is to changes in price.
c) how responsive income is to changes in education levels.
d) how responsive price is to changes in quantity demanded.

For the next part, suppose the income elasticity of demand for butter is 0.11. That means butter is:

a) a luxury good.
b) a normal good.
c) an inferior good.
d) a complementary good.
e) a substitute good.

1) The correct answer is letter "A": how responsive quantity demanded is to changes in income.

2) The correct answer is letter "A": a luxury good.

Explanation:

1) Income elasticity of demand refers to the fluctuations of the quantity demanded in front of changes in income. It is calculated by dividing the percentage change of quantity demanded by the percentage change in income. If the result is greater than (1) or equal to (0), the demand is elastic. If the result is lower than (1) the demand is inelastic.

2) In case the demand elasticity of butter is 0.11, it implies it is elastic. It means in front of small changes in income, would change exponentially the quantity demanded for butter. This characteristic is typical in luxury items since when people's income increase the quantity demanded increase and when people's income decrease so does quantity demanded.

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