Question

A. When Reema earned AED 25,500 per month, she bought 12 Big Mac meals each month at McDonalds. Now that she earns AED 32,500 per month, she only buys 9 Big Mac meals a month. Calculate the Income Elasticity of Demand (IED) for McDonalds food.

B.  With respect to the answer in question A, state whether McDonalds food is a normal or inferior good.   

C.  With respect to the answer in question A, where are the best places to open a McDonalds store explain.

Answer 1

A.) Formula for calculating Income Elasticity of demand-

Income Elasticity of demand=Percentage change in quantity demanded / Percentage change in Income

now, percentage change in quantity demanded= Change in quantity demanded / Initial quantity x 100

Given :- Initial quantity demanded by Reema= 12 Big Mac meals

New quantity demanded by Reema= 9 Big Mac meals.

so, Change in quantity demanded= Initial quantity - New quantity

= 12 - 9 = 3 Big Mac meals

Change in quantity demanded= 3 Big Mac meals

Percentage change in quantity demanded= 3 / 12 x 100

= 0.25 x 100

percentage change in quantity demanded= 25%

now, Percentage change in income= Change in Income / Initial Income x 100

Given- Initial Income Reema earned = AED 25,500 per month

New Income Reema earns now=  AED 32,500 per month

so, Change in Income= New Income - Initial Income

= AED 32,500 - AED 25,500

Change in Income= AED 7,000

Percentage change in income= 7,000 / 25,500 x 100

= 0.2745 x 100

  Percentage change in income= 27.45%

Income Elasticity of demand=Percentage change in quantity demanded / Percentage change in Income

Income Elasticity of demand= 25 / 27.45

Income Elasticity of demand= - 0.91 ( negative because with increase in income, quantity demanded of Big Mac meals has reduced).

B.)  McDonalds food is an inferior good because with increase in the income of Reema, quantity demanded of Big Mac meals at McDonalds has reduced i.e., less is demanded at higher income and more is brought at lower income. In case of inferior goods, when income increases, consumers switch over from inferior goods to superior foods because with more income they can afford superior goods and hence quantity demanded of inferior goods reduces with increase in income.

C.) The best places to open a McDonalds store are places where people with lower income reside. People who have high income will not purchase more of inferior good as they can purchase superior good because of high income. When income is low, people consume more of inferior good as they cannot afford superior goods.