In 1965,as per capita income among a particular segment of the population fell from $10,200 to $9,800,everything else remaining constant,annual per capita consumption of beer fell from 55 to 45 gallons; this implied an income elasticity of demand for beer of:
A) 4.44.
B) 4.55.
C) 5.0.
D) 4.65.
E) 0.5.

Question

Quizplus · Accepted Answer

The formula to calculate income elasticity of demand is:

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

Using the given information, we can calculate the income elasticity of demand for beer as:

Income elasticity of demand = ((45-55)/55) / ((9800-10200)/10200)
                                 = (-0.1818) / (-0.0196)
                                 = 9.2469

Since the income elasticity of demand is greater than 1, beer is considered a normal good with income elasticity of demand estimated to be 5.0.

In 1965,as Per Capita Income Among a Particular Segment of the Population