1. We learned that goods fall into two major categories with respect to the Income Elasticity of Demand, , normal and inferior. Normal goods have positive income elasticities, as income increases more is demanded. Inferior goods have negative income elasticities, as income rises less is demanded. Naturally then, normal goods have larger income elasticities than inferior goods.

   Within the broad category of normal goods are two sub-catagories; luxuries and necessities. Luxuries are goods with income elasticities greater than 1; meaning, as income rises demand for these goods increases at a faster rate. Thus, as we examine the choices given for this we are looking for a luxury good as our most likely answer. Among the choices given, only stereo equipment qualifies as a likely luxury good for most income levels.

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