The owner of a kayak tour business has been looking over the latest data from the Census, which reported that income in the area where she is based has increased by 20%. If the owner also observed that her sales increased by 10% during the same period, what is the income elasticity of demand and how would you interpret it? A) E_Y = 2; for a 1% increase in income, the owner can expect to see a 2% increase in her sales. B) E_Y = 0.5; for a 1% increase in income, the owner can expect to see a 0.5% increase in her sales. C) E_Y = 2; for a 1% increase in income, the owner can expect to see a 0.5% increase in her sales. D) E_Y = 0.5; for a 1% increase in income, the owner can expect to see a 2% increase in her sales.

Question

Quizplus · Accepted Answer

The income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income. Here, it is (10% / 20%) = 0.5. This means for a 1% increase in income, the owner can expect to see a 0.5% increase in her sales, indicating a positive but relatively inelastic demand.

The Owner of a Kayak Tour Business Has Been Looking