Howard buys 5 suits a year when he earns $70,000. When his income increases to $200,000, he buys 15 suits a year. From the midpoint method, his income elasticity of demand for suits is:
A) 1.04
B) 0.96
C) -1.04
D) -0.96
E) 0.08

Question

Quizplus · Accepted Answer

The midpoint method formula for income elasticity of demand is [(Q2 - Q1) / ((Q2 + Q1) / 2)] / [(I2 - I1) / ((I2 + I1) / 2)]. Plugging in the values: [(15 - 5) / (15 + 5) / 2] / [(200,000 - 70,000) / (200,000 + 70,000) / 2] = 1.04.

Howard Buys 5 Suits a Year When He Earns $70,000