A Level Economics AQA Practice Exam

What characterizes a luxury good in economics?

1. A good with an income elasticity less than 1

2. A good with an income elasticity equal to 1

3. A good with an income elasticity greater than 1

4. A good that has no impact on demand when income changes

The correct answer is: A good with an income elasticity greater than 1

The correct characterization of a luxury good in economics is based on having an income elasticity greater than 1. This means that as consumer income increases, the quantity demanded for luxury goods increases at a proportionally larger rate. In other words, luxury goods become even more desirable as people have more money to spend, indicating that they are not just necessities but also enhance a person's quality of life or status. In contrast, a good with an income elasticity less than 1 indicates that it is a necessity; as income increases, demand for these goods rises, but at a slower rate compared to the increase in income. A good with an income elasticity equal to 1 shows that demand changes proportionately with income, which does not fit the definition of luxury goods. Lastly, a good that has no impact on demand when income changes would not be classified as a luxury good at all, as luxury goods inherently thrive on increased demand alongside rising incomes.