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.

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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.

Rahul Sunny answered 2 years ago

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