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

Question

Quizplus · Accepted Answer

The income elasticity of demand for peanut butter is -0.7, meaning it's an inferior good (negative elasticity). With a 15% drop in income, demand for peanut butter increases because people switch to less expensive goods. The calculation is -0.7 * (-15%) = 10.5%. Therefore, you should buy 10.5% more peanut butter.

You Are the Manager of a Supermarket,and You Know That