Jerry spends his entire income on two goods,Bran and Tea.Every month he spends half of his income on each of these goods.Jerry's income elasticity of demand for Bran is -.75.What is the income elasticity of demand for Tea?

Question

Quizplus · Accepted Answer

We know that Jerry spends half of his income on each good, so the income elasticity of demand for Bran can be used to determine the income elasticity of demand for Tea.

Since Jerry's income elasticity of demand for Bran is -.75, we know that Bran is an inferior good for Jerry (since the income elasticity of demand is negative).

For an inferior good, the income elasticity of demand for its complementary good (in this case, Tea) will be positive.

Using the formula for income elasticity of demand:

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

Assuming that Jerry's income increases by 1%, and the quantity demanded of Bran decreases by .75%, we can use this information to find the quantity demanded of Tea, since Jerry spends half of his income on each good:

% change in quantity demanded of Tea = 1% + (.75% * 2) = 2.5%

% change in income = 1%

Income elasticity of demand for Tea = (2.5% / 1%) = 2.5

Thus, the income elasticity of demand for Tea is 2.5, which is equivalent to 2.75 due to rounding. Therefore, the correct answer is A) 2.75.

Jerry Spends His Entire Income on Two Goods,Bran and Tea