A Level Economics AQA Practice Exam

For which type of good does demand rise disproportionately with an increase in income?

1. Normal good

2. Inferior good

3. Luxury good

4. Substitute good

The correct answer is: Luxury good

Demand rises disproportionately with an increase in income for luxury goods. These types of goods are characterized by their appeal to consumers’ status and wealth, meaning that as individuals experience an increase in income, they tend to buy significantly more luxury goods relative to other goods. Luxury goods are often seen as non-essential and can include items such as designer clothing, high-end electronics, and gourmet food. When consumers have higher disposable incomes, their willingness and capacity to spend on these high-cost items increase dramatically, leading to a surge in demand that is greater than proportional to the income increase. In contrast, normal goods also see an increase in demand as income rises, but the increase is more moderate and generally proportional to the income change. Inferior goods experience a decrease in demand as consumer incomes rise, as people are likely to switch to higher-quality alternatives. Substitute goods relate to consumer choices based on alternatives and do not inherently depend on income changes in the same way luxury goods do. Therefore, the demand for luxury goods responds significantly more to income changes than other types of goods.