Answer:
a. increase by 2.5%, and X is an inferior good.
Explanation:
The income elasticity of demand is the ratio between the percentage change in demand and the percentage change in income.
The change in demand caused by a 5% decrease in income is:
[tex]-0.5=\frac{\%\ change\ demand}{\%\ change\ income} \\-0.5=\frac{D}{-5\%} \\D=+2.5\%[/tex]
Demand will increase by 2.5%. A good whose demand increases when consumer income decreases is called an inferior good.
Therefore, the answer is a. increase by 2.5%, and X is an inferior good.
