Is a good inferior, normal or a luxury?

This activity is perfect for a Principles of Micro course.
Students have typically covered the price elasticity of demand and supply before income elasticity.

There are no limitations on class size.
The activity takes 5-7 minutes depending on the time allotted to the group discussion and the debrief.

Overview

This activity is designed to get students debating about the three different income elasticities (inferior, normal and luxury goods). After completing the exercise students will have an intuitive understanding of income elasticity.

Expected Student Learning Outcomes

 

At the end of this activity the students will be able to:

Understand the relationship between a change in income and how this affects the demand for various types of goods. 
Understand why different people of different means see the same good as having a different income elasticity of demand.

 

Information Given to Students

 

Suppose you get your first real job after college. How might this change what you buy?

Prompt: After graduating from college you get a full time position that pays $60,000. Prior to graduation, your annual income from part-time jobs was $10,000 annually.

Now that you are making good money, will your expenditures on toothpaste fall, stay the same, or increase?

The amount spent will fall as a percentage of your budget. 
A. I think that it will stay the same, since brushing your teeth is something you will continue to do twice a day. 
B. You'll switch to toothpaste brands that offer greater cavity protection, gum health, or whitening so you'll spend somewhat more. 
C. You'll be able to afford specialized tooth whitening treatments, orthodontic care, and an electric toothbrush – all of which are luxury goods.

 

Prefatory remarks:
I have an activity that I hope you will enjoy! Have you ever thought about what you will be able to afford once you graduate? What are some things you'd love to buy but cannot afford now? What are some things you purchase now because your income is low? After this exercise you will understand how economists attempt to answer these questions by considering income elasticity.
Answer for the question:

C) is the best answer but B and D are defensible. A is true but does not address the question of whether or not toothpaste is inferior, normal, or a luxury.

Summary remarks:

The key to understanding how income affects consumption is thinking about whether the good being considered is an inferior, normal or a luxury good. The same good can also be inferior for one person, normal for the next or a luxury for another, all depending on their income level. When economists measure income elasticity they calculate a coefficient that tells about the relationship under particular circumstances. Your experience may be different if your income level is much lower or higher.

(1) Now that you are making good money, will the amount you spend on fast food fall, stay the same, or increase?

Since you can afford better food when you eat out, the consumption of fast food will fall.
There will always be times when you need to grab something quickly, so fast food consumption will stay about the same. 
Since I was poor while attending college I was unable to eat out very much and when I did, fast food was all I could afford. Now that I have a real job, I go to Cane's three times a week!
We can't be sure. Fast food can be an inferior good, necessary or a luxury – it all depends on the person and their income level.

NOTE: D is best, but the other answers are all defensible.

(2) Now that you are making good money, will the amount you spend on lottery tickets fall, stay the same, or increase?

I was too poor while in college to play the lottery. Why would I waste money on the lottery after graduating?
Now I can afford to buy $20 a week in lottery tickets to maximize my chances of winning!
Even though I'll be making $60,000 that doesn't go very far in Austin, TX. I'll still play my favorite lottery numbers. I'm sure I'll win eventually. 
Research on lottery players indicates that most are from low-income households.

NOTE: D is the best answer. A is a good answer. B is a misconception that shows players do not understand expected value. C is the gambler's fallacy.