A simple linear demand function may be stated as Q = a - bP + cI where Q is quantity demanded, P is the product price, and I is consumer income. To compute an appropriate value for c, we can use observed values for Q and I and then set the estimated income elasticity of demand equal to:
A) c(I/Q).
B) c(Q/I).
C) -b(I/Q).
D) Q/(cI).

Question

Quizplus · Accepted Answer

Income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income, which simplifies to (ΔQ/ΔI) * (I/Q). Since c represents the change in quantity demanded for a change in income in the demand function, setting the estimated income elasticity equal to c(I/Q) aligns with the formula for income elasticity of demand.

A Simple Linear Demand Function May Be Stated as Q