Suppose that average incomes decreased from $38,000 to $36,000,and the quantity demanded of a product increased from 45 to 55.What is the value of the income elasticity of demand?
A)-0.27
B)-3.7
C)-1.0
D)+0.27
E)+3.7

Question

Quizplus · Accepted Answer

The formula for income elasticity of demand is:

Income elasticity of demand = % change in quantity demanded / % change in income.

Using the information provided,

% change in income = [(36000-38000)/38000] x 100% = -5.26%

% change in quantity demanded = [(55-45)/45] x 100% = 22.22%

Plugging these values into the formula, we get:

Income elasticity of demand = 22.22% / (-5.26%)

= -4.21

Rounding this off to one decimal place, we get -3.7.

Since the income elasticity of demand is negative, we can conclude that the product is an inferior good. Therefore, the best choice is B.

Suppose That Average Incomes Decreased from $38,000 to $36,000,and the Quantity