Question

In: Economics

If a person’s income changes from $650/week to $720/week. If his demand for a product changes...

If a person’s income changes from $650/week to $720/week. If his demand for a product changes from 84 units to 78 units, calculate the income elasticity of demand and explain the meaning of this value.

Solutions

Expert Solution

If a person’s income changes from $650/week to $720/week. If his demand for a product changes from 84 units to 78 units

Income Demand
I1 = 650 Q1=84
I2 = 720 Q2 = 78

Mid point method of income elasticity:

=> Income elasticity = [(Q2 - Q1) / (Q2+Q1)/2] ÷ [(I2 - I1) / (I2 + I1)/2]

=> Income elasticity = [(78 - 84) / (78 +84)/2] ÷ [(720 - 650) / (720 + 650) / 2]

=> Income elasticity = [(-6) / (162 /2) ] ÷ [(70) / (1370 /2)]

=> Income elasticity = [-6 / 81] ÷ [ 70 / 685]

=> Income elasticity = [-6 /81] * [685 / 70]

=> income elasticity = -0.72

Income elasticity of demand is -0.72.

The negative value of income elasticity of demand suggests that the good is inferior.


Related Solutions

Income Elasticity of Demand characterizes how the demand for a good changes when consumer or customer income changes.
Income Elasticity of Demand characterizes how the demand for a good changes when consumer or customer income changes. This responsiveness to income also tells you whether the good in question is considered to be a normal good, or an inferior good.Firstly, define what exactly we mean in economics by a normal good and an inferior good?In two different articles in the 90’s some economists estimated the following income elasticities of demand for three goods. Based on the estimates below, which goods...
How does a change in a person’s income effect their demand for a normal good and...
How does a change in a person’s income effect their demand for a normal good and an inferior good? Give an example of a normal good and inferior good.
Money demand. Suppose that a person’s wealth is $50,000 and that her yearly income is $60,000....
Money demand. Suppose that a person’s wealth is $50,000 and that her yearly income is $60,000. Also, suppose that her money demand function is given by:Md = $Y(0.35 − i) (a) What is her demand for money and her demand for bonds when the interest rate is 5%? 10%? Remember that the sum of money and bonds demanded is total wealth. (b) Describe the effect of the interest rate on money demand and bond demand. (c) Suppose that the interest...
4. Calculate the income-elasticity of demand for a product, when income rises from $ 18,000 to...
4. Calculate the income-elasticity of demand for a product, when income rises from $ 18,000 to $ 20,000, while demand decreases from 28,000 to 26,000. Sort the good. I. Identification of variables I1= Q1= I2= Q2= II. Get the changes ▲Q = ▲I= III. Get the averages _ Q= _ I = .Calculate EID and classify the good =
Phineas receives $100 per week from his parents. He spends his entire income on two goods:...
Phineas receives $100 per week from his parents. He spends his entire income on two goods: Sprite (which cost $2 each) and chicken burgers (which cost $4 each). a) (8 points) Draw Phineas's budget constraint. Suppose that Phineas decides to purchase 20 Sprites and 20 chicken burgers this week. Is this choice within Phineas's opportunity set? Explain and show this choice on your graph. (Do not forget to label the axes of your graph) b) (2 pts) What is the...
Phineas receives $100 per week from his parents. He spends his entire income on two goods:...
Phineas receives $100 per week from his parents. He spends his entire income on two goods: Sprite (which cost $2 each) and chicken burgers (which cost $4 each). a) (8 points) Draw Phineas's budget constraint. Suppose that Phineas decides to purchase 20 Sprites and 20 chicken burgers this week. Is this choice within Phineas's opportunity set? Explain and show this choice on your graph. (Do not forget to label the axes of your graph) b) (2 pts) What is the...
Sudi spends his income on two goods. His income elasticity of demand for the first good...
Sudi spends his income on two goods. His income elasticity of demand for the first good is ~1 = 0.2, while his income elasticity of demand for the second good is ~ 1 = 2. Illustrate in one diagram how a 10% increase in his income would affect the quantity he demands of the two goods that shows an incomeconsumption curve, and create another diagram for each of the two goods that shows an Engel curve. How do the slopes...
Demand for a product is 400 units per week. Lead time is one week. When inventory...
Demand for a product is 400 units per week. Lead time is one week. When inventory level reached 1000 units, the material manager orders 6 weeks of demand. Compute the average inventory. 1000 2000 3000 1800 None of the above
Antonio has a $650 per semester from his father to buy textbooks for classes. New text...
Antonio has a $650 per semester from his father to buy textbooks for classes. New text books average $150 per book while used books cost only $75 each.   The bookstore announces that there will be a 10 percent increase in the price of new books and a 20 percent increase in the price of used books. Antonio’s father offers him an extra $50 per semester. a. Show what happens to Antonio’s budget line without the extra $50 What happens to...
Karl’s income elasticity of demand for peanut butter is 0.20 while his price elasticity of demand...
Karl’s income elasticity of demand for peanut butter is 0.20 while his price elasticity of demand for peanut butter is -1.20.    Karl’s income is $20,000 per year and the price of peanut butter is currently $4.00.    Karl currently spends $2,000 per year on peanut butter   Pea butter is taxed which increases its price by 5%. a. Calculate what happens to Karl’s purchases of peanut butter. b. Will Karl end up spending on peanut butter after the price increase? Explain c....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT