Last year,Carolyn bought 6 pairs of earrings when her income was $40,000.This year,her income is $52,000,and she purchased 7 pairs of earrings.Holding other factors constant,it follows that Carolyn's income elasticity of demand is about
A) 0.59, and Carolyn regards earrings as an inferior good.
B) 0.59, and Carolyn regards earrings as a normal good.
C) 1.7, and Carolyn regards earrings as an inferior good.
D) 1.7, and Carolyn regards earrings as a normal good.

Question

Quizplus · Accepted Answer

The income elasticity of demand (Ey) can be calculated using the formula:

Ey = [(Q1 - Q0)/Q0] / [(I1 - I0)/I0]

where Q0 is the initial quantity, Q1 is the new quantity, I0 is the initial income, and I1 is the new income.

Using the values given in the problem:

Q0 = 6 earrings
Q1 = 7 earrings
I0 = $40,000
I1 = $52,000

Ey = [(7 - 6)/6] / [(52,000 - 40,000)/40,000]
Ey = 0.59

Since the income elasticity is positive and less than 1, it means that earrings are a normal good, i.e. Carolyn purchases more earrings as her income increases, but the increase in demand is relatively small compared to the increase in income. Therefore, the best choice is B.

Last Year,Carolyn Bought 6 Pairs of Earrings When Her Income