Question

4). Calculate the numerical value of income elasticity in each of the following situations using the midpoint approach, and identify if the product is normal or inferior product.

1. Purchases of automobiles rise from 2 million to 3 million when the average consumer income per year increases from $50,000 to $70,000.
2. A fall in average consumer incomes per month from $3,000 to $2,800 leads to a drop in visits to massage therapists from 120,00 to 100,000

5). Calculate the numerical value of the price elasticity of supply I each of the following situation using midpoint method

1. A rise in the price of wheat from $300 to $350 per metric tonne increases the amount supplied by wheat farmers from 8 million to 9 million tonnes.

2. The amount of farmed salmon sold drops from 2 million to 1 million kilograms when the price of salmon falls from $8 to $ 7.50.

3. When the price of oranges rises from 2 million to 3 million per kilogram, the annual amount supplied rises from 2 million to 4 million kilograms.

Answer 1

Question 4)

Income elasticity of Demand measures the degree of responsiveness of the quantity demanded of a commodity to a change in the income of consumers. It is calculated as-

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

According to the midpoint method-

% change in quantity = change in quantity/ average quantity x 100

And

% change in income= change in income / average income x 100

Given that purchases of automobile increases from 2 million to 3 million when average consumer income per year increases from $50,000 to $70,000 .

So, new quantity= 3 million, Initial quantity= 2 million

Change in quantity= new quantity - Initial quantity

Change in quantity= 3 million - 2 million

Change in quantity= 1 million

Average quantity= ( new quantity+ Initial quantity)/2

Average quantity=(3 million + 2 million )/2

Average quantity= 5 million/2= 2.5 million

So,

% change in quantity= change in quantity / average quantity x 100

% change in quantity= 1 million /2.5 million x 100

% change in quantity= 0.4 x 100= 40%

New income=$70,000; Initial income=$50,000

Change in income = new income - Initial income

Change in income= $70,000 - $50,000=$20,000

Average income=( new income + Initial income)/2

Average income= ($70,000+$50,000)/2

Average income= $120,000/2= $60,000

So,

% change in income= change in income / average income x 100

% change in income= $20,000/$60,000 x 100

% change in income = 0.33 x 100= 33%

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

Income elasticity of demand= 40% / 33%

Income elasticity of demand for automobile is 1.21

Automobile is a NORMAL GOOD.

Normal goods are those goods the demand for which increases as income of consumers increases and decreases as income of consumers decreases. Hence, there exists a positive relationship between income and demand for normal goods. Here, as increase in income of consumers has lead to an increase in demand for automobile, automobile is a NORMAL GOOD.

Provides that average consumer income falls from $3,000 to $2,800 leads to a drop in visit of massage therapist from 120,000 to 100,000

New quantity= 100,000 ; Initial quantity= 120,000

Change in quantity= new quantity - Initial quantity

Change in quantity= 100,000 - 120,000=- 20,000 ( negative sign indicates a decrease)

Average quantity=( new quantity+ Initial quantity)/2

Average quantity= (100,000+120,000)2

Average quantity=(220,000/2)= 110,000

So,

% change in quantity= change in quantity/ average quantity x 100

% change in quantity= -20,000/110,000 x 100

% change in quantity= -0.18 x 100= -18%

( Negative sign indicates a decrease)

New income= $2,800 , Initial Income= $3,000

Change in income= new income - Initial Income

Change in income= $2,800-$3,000= -$200 ( negative sign indicates a decrease)

Average income=(new income+ Initial income)/2

Average income= ($2,800+$3,000)2

Average income= $5,800/2= $2,900

So,

% change in income= change in income / average income x 100

% change in income= -$200/$2900 x 100

% change in income= -0.06 x 100

% change in income= -6%

( Negative sign indicates a decrease)

So,

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

Income elasticity of demand= -18% / -6%

Income elasticity of demand= 3

Income elasticity of demand for massage therapist is 3.

Massage therapist is a NORMAL GOOD.

Normal goods are those goods the demand for which increases as income of consumers increases and decreases as income of consumers decreases. Hence, there exists a positive/ direct relationship between income of consumers and demand for normal goods. As a decrease in income of consumers leads to a decrease in demand for massage therapist, massage therapist are NORMAL GOOD.