A good has an income elasticity of +0.5.An increase in income from $15,000 to $25,000 will lead to a
A)2.5 percent increase in the quantity demanded of the good.
B)5 percent increase in the quantity demanded of the good.
C)5 percent decrease in the quantity demanded of the good.
D)25 percent decrease in the quantity demanded of the good.
E)25 percent increase in the quantity demanded of the good.

Question

Quizplus · Accepted Answer

The income elasticity of +0.5 means that for every 1% increase in income, the quantity demanded increases by 0.5%. The income increase from $15,000 to $25,000 is a 66.67% increase. Therefore, the quantity demanded will increase by 0.5 * 66.67% = 33.335%, which is closest to 25% increase.

A Good Has an Income Elasticity of +0