What type of goods tends to have large income elasticities?

The correct answer is luxuries, which are goods for which demand increases more than proportionately as consumer income rises. This means that as individuals have more disposable income, they are likely to purchase significantly more luxury items as opposed to necessities or other types of goods. Luxury goods provide additional satisfaction and are often considered as non-essential items that enhance lifestyle, making them particularly sensitive to changes in income.

People with higher incomes tend to allocate a larger fraction of their budget to luxury goods, which leads to a greater increase in their demand compared to lower-income consumers. This characteristic results in a high income elasticity of demand for luxuries, meaning that for every percentage increase in income, the increase in the quantity demanded for luxury goods is greater than one percent.

On the other hand, necessities often have lower income elasticities because they are fundamental goods that people need regardless of their income level. Durables generally have income elasticities that fall somewhere between necessities and luxuries; they are affected by income changes but do not exhibit the same high sensitivity as luxury goods. Substitutes, while relevant in terms of market competition and consumer choice, do not inherently link to income elasticity as directly as luxury goods do. This further clarifies why luxuries stand out as the correct