The level of household income rose from $28,000 to $30,000 and the number of eggs consumed annually per capita increased from 140 to 150. Assuming that all other economic variables were held constant,
A) the arc income elasticity of demand is equal to 5.
B) the arc income elasticity of demand is equal to 1.
C) the arc income elasticity of demand is equal to -5.1
D) eggs are an inferior good and none of the above is correct.

Question

Quizplus · Accepted Answer

The arc income elasticity of demand can be calculated using the formula: [(Q2 - Q1) / ((Q2 + Q1)/2)] / [(I2 - I1) / ((I2 + I1)/2)], where Q1 and Q2 are the initial and final quantities demanded, and I1 and I2 are the initial and final incomes. Plugging in the given values: [(150 - 140) / (150 + 140)/2] / [($30,000 - $28,000) / ($30,000 + $28,000)/2] = 10/145 / 2000/29000 = 0.069 / 0.069 = 1. This means that for a 1% increase in income, the quantity demanded of eggs increases by 1%, indicating that eggs are a normal good, not an inferior good.

The Level of Household Income Rose from $28,000 to $30,000