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, that is greater than zero; as income increases more is demanded. Inferior goods have negative income elasticities, as income rises less is demanded. Naturally then, normal goods would have larger income elasticities than inferior goods.

   We also learned that 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.

1. rice. Rice would probably have a small income elasticity. It would either be a necessity or even possibly an inferior good. Many people may purchase rice because it is an inexpensive food, and thus may purchase less as income rises.
2. toothpaste. Like most personal care products, toothpaste would almost certainly fall into the necessity group and thus have a small income elasticity; probably positive, but near zero.
3. beer. Could be an inferior good as some consumers might drink mixed drinks or wine as income rises. Unlikely, in any case, to be a luxury good unless the consumer is starting from a very low income level.
4. stereo equipment. Almost certainly a luxury good with a large income elasticity. As income rises consumers may buy more equipment; putting stereos in their offices, vacation homes, and other rooms in their primary dwelling. If we also measure equipment in terms of money spent, it would be a luxury good; since upgrading equipment is a common reaction to income increases.
5. newspapers. Likely to be a necessity, though possibly having the highest income elasticity after stereos. Higher income consumers may subscribe to several newspapers; if so, this would give newspapers a higher income elasticity.