You are the manager of a supermarket, and know that the income elasticity of peanut butter is exactly -0.7.Due to the recession, you expect incomes to drop by 15% next year.How should you adjust your purchase of peanut butter?
A)Buy 10.5% more peanut butter.
B)Buy 2.14% more peanut butter.
C)Buy 6.2% less peanut butter.
D)Buy 9.8% less peanut butter.

Question

Quizplus · Accepted Answer

The income elasticity of demand is -0.7, meaning peanut butter is an inferior good. A 15% decrease in income will lead to a 10.5% increase in demand for peanut butter (-0.7 * -15% = 10.5%).

You Are the Manager of a Supermarket, and Know That