Shawna wins the lottery and her income increases by 60 percent.She used to buy 10 pints of cottage cheese per month and now she buys 12 pints.Her income elasticity of demand for cottage cheese is ________,making it a(n)________ good.
A) 3; luxury
B) 3.59; normal
C) 0.33; necessity
D) 0.28; inferior
E) -0.33; inferior

Question

Quizplus · Accepted Answer

Income elasticity of demand (Ey) = percentage change in quantity demanded/percentage change in income
Percentage change in income = 60%
Percentage change in quantity demanded = ((12-10)/10) x 100% = 20%
Ey = 20%/60% = 0.33

Since the elasticity is less than 1, cottage cheese is a necessity good - meaning that demand for it does not increase as much as income increases.

Shawna Wins the Lottery and Her Income Increases by 60