In: Economics
Prior to 2018, Yusuf’s monthly salary was $1,000 and he used to purchase 40kg of dates. Now, his salary is $5,000 and the quantity of date increased to 75kg.
a). Calculate income elasticity of demand for date
c) Explain your answer in (a)
Income elasticity of demand = % change in quantity demanded ÷ % change in income.
a)
E (d) = dD/D ÷dI/I
where E(d) = income elasticity of demand,
D= quantity demanded,
I= income of the consumer.
Here we know that,
Quantity demanded in 2018 equals 40
Quantity demanded at present = 75
Income of the consumer in 2018 = 1000
Income of the consumer at present = 5000.
So let us assume these values in the equation to find out Income elasticity of demand. That is,
E(d)= 75/40 ÷ 5000/1000
= 1.875 ÷ 5
= 0. 375
b)
The answer in question a explains the income elasticity of demand for date . The income elasticity of demand for date is less than 1 and greater than zero which means the income elasticity of demand for date is elastic.
The income elasticity of demand for date is elastic because date is a necessity for the consumer as milk and medicine. Variations in income must prompt the consumer to consume more amount of dates as it is a necessity good.