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

Since Jerry spends half of his income on each good, the income elasticity of demand for both goods must sum up to 1 (Engel's Law). Given that the income elasticity for Bran is 0.75, the income elasticity for Tea must be 1.25 to make the total equal to 1.

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