Question

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 =

Answer 1

Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain good to a change in real income of consumers who buy this good, keeping all other things constant. The formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income. With income elasticity of demand, you can tell if a particular good represents a normal or inferior good .
I1 = $18000

I2= $20000

Q1=$28000

Q2=$26000

percentage change in quantity = (Q2-Q1/Q1 )*100

=(-2000/28000)*100

=(-200/28)=-7.14

percentage change in income = (I2-I1/I1)*100

=(2000/18000)*100

=(200/18)=11.11

income elasticity of demand = % Change in demand divided by the % change in income

=-7.14/11.11= -0.64

since the income elasticity of demand is negative, then the commodity is an inferior good. An inferior good is one whose demand decreases as incomes increase or demand increases as incomes decrease.​In other words, an inverse relationship exists between demand and income, and the income elasticity of demand is negative. This relationship is unusual.​