Fred's income has just risen from $940 per week to $1,060 per week. As a result, he decides to purchase 9 percent more steak per week. The income elasticity of Fred's demand for steak is
A) 0.75.
B) 0.90.
C) 1.00.
D) 1.33.

Question

Quizplus · Accepted Answer

Income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income. Fred's income increased by ($1,060 - $940) / $940 = 0.1277 or 12.77%. The quantity of steak he buys increased by 9%. Therefore, the income elasticity is 9% / 12.77% = 0.75.

Fred's Income Has Just Risen from $940 Per Week to $1,060