Question

In: Economics

The price of a fish dinner is $4. When Harry’s old income was $1,500 per month,...

The price of a fish dinner is $4. When Harry’s old income was $1,500 per month, his old monthly demand for fish dinners was Q = 18 – 0.5P. When Harry got a pay raise and began to earn a new income of $2,000 per month, his demand shifted to a new function of Q = 21 – 0.5P. Given this information, find Harry’s income elasticity (EI) for fish dinners. Harry’s income elasticity is for fish dinner is _____________.

Solutions

Expert Solution

Income elasticity of demand can be defined as the percentage change in quantity demanded in response to percentage change in income

IE = %change in quantity demanded/%change in income

It can be calculated using the following formula.

IE =

Where ​​​​​ is change in quantity demanded and is change in income. Y is the initial income and Q is the initial Quantity demanded.

Inititial quantity demanded when income is 1500

Q = 18-0.5P

P= 4

Q = 18-(0.5*4) =

18-2 =16

Quantity demanded when income is 15000 =16

Quantity demanded when income is 2000

Q = 21-0.5P

Q = 21- 0.5*4=

21-2 =19

IE = (3/500) * (1500/16)

4500/8000= 0.5625

Harry's income elasticity for fish dinner = 0.5625

Rahul Sunny answered 1 year ago
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