Question

Suppose income elasticity of demand is equal to 2.0

a. If income increases by 10%, Quantity Demanded will ____ by ___%

b. The demand is income ____ because the coefficient is _____1.

c. Since the income elasticity is ____, buyers view this good as a(n) ____ good.

d. As income increases, demand for this good will ___; as income increases, the demand curve will shift to the ____.

Answer 1

a. If income increases by 10%, Quantity Demanded will increase by 20%

b. The demand is income elastic because the coefficient is greater than 1.

c. Since the income elasticity is positive, buyers view this good as a(n) normal good.

d. As income increases, demand for this good will increase; as income increases, the demand curve will shift to the right.

Explanation:

a) Income elasticity of demand = % change in quantity demanded divided (x) by percentage change in income.

2 = x/10

2*10 = x

x = 20

b) Elasticity of demand greater than one implies elastic demand. When lower than one, it implies inelastic demand. Elasticity equal to one shows unitary elastic demand. Thus, the coefficient determined by formula in (a) indicates the degree of elasticity.

c) Income elasticity is positive for normal goods and negative for inferior goods.

d) An increase in demand due to factors other than the price shifts the demand curve to the right. Here, the factor is income.