Question

Suppose empirical analysis concludes that the income elasticity of demand for Kraft Dinner​ (KD) is 0.2. The interpretation of this result is that

Answer 1

Income elasticity of demand is the responsiveness of the quantity demanded as the income changes.

Income elasticity of demand:

Here the income elasticity of demand is 0.2

The income elasticity of demand is positive so there exists a positive relationship between income and quantity demanded of kraft dinner. That is, an increase in income will increase the quantity demanded of kraft dinner and vice versa.

As the magnitude of income elasticity of demand for (KD) is less than 1, therefore it means that the percentage change in income is more than the percentage change in quantity demanded of kraft dinner.

Example:

It could mean that a 10% increase in income leads to a 2% increase in quantity demanded of kraft dinner. Or that the 10% decrease in income leads to a 2% decrease in quantity demanded of kraft dinner.

There are many such percentage changes for which the income elasticity of demand for Kraft dinner is 0.2. But the condition is that as income increases, the quantity demanded must also increase. And vice versa. The relation must be positive. Such that the ratio of percentage increase/decrease in quantity demanded of kraft dinner over percentage increase/decrease in income is 0.2.

Two more things can be interpreted when the income elasticity of demand for Kraft dinner is 0.2

Firstly, the sign of income elasticity is positive. So it means that there exists a positive relationship between the income of the consumer and the quantity demanded of Kraft dinner. Since normal goods have a positive relationship between income and quantity demanded. That is, an increase in the income of the consumer, the consumer buys more normal goods and vice versa. So the kraft dinner is a normal good.

Secondly, the modulus of income elasticity is less than 1. It means that the demand for kraft dinner is relatively income inelastic.