Suppose that a 20 percent increase in income increases the quantity of good A demanded from 19,200 to 20,800 units. The income elasticity of demand for good A is
A)0.05.
B)0.8.
C)0.4.
D)1.2.
E)2.0.

Question

Quizplus · Accepted Answer

Income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income. The percentage change in quantity demanded is ((20,800 - 19,200) / 19,200) * 100 = 8.33%. The percentage change in income is 20%. Therefore, the income elasticity of demand is 8.33% / 20% = 0.4165, which rounds to 0.4.

Suppose That a 20 Percent Increase in Income Increases the Quantity