Delilah's income rises by 8%. She decides to increase the number of movie tickets she purchases by 20%. Her income elasticity of demand for movie tickets is:
A)2.5.
B)0.4.
C)0.8.
D)-2.5.

Question

Quizplus · Accepted Answer

Income elasticity of demand is defined as the percentage change in quantity demanded of a good or service divided by the percentage change in income.

In this scenario, Delilah's income increases by 8% and she decides to increase the number of movie tickets she purchases by 20%. Using the formula for income elasticity of demand:

% change in quantity demanded = 20%
% change in income = 8%

Income elasticity of demand = (% change in quantity demanded) / (% change in income)
= 20% / 8%
= 2.5

Since the income elasticity of demand is greater than 1, this means that movie tickets are a luxury good for Delilah - her demand for movie tickets is very responsive to changes in her income.

Delilah's Income Rises by 8