Question

In: Economics

Table 4 Income Quantity of Good X Purchased Quantity of Good Y Purchased $30,000 2 20...

Table 4

Income	Quantity of Good X Purchased	Quantity of Good Y Purchased
$30,000	2	20
$40,000	6	10

Refer to Table 4. Using the midpoint method, the income elasticity of demand for good Y is

Select one:

a. -2.33, and good Y is an inferior good.

b. 2.33, and good Y is a normal good.

c. -0.43, and good Y is a normal good.

d. -0.43, and good Y is an inferior good.

Expert Solution

Answer : The answer is option a.

Y (Changes in good Y) = New quantity demanded - old quantity demanded = 10 - 20 = - 10

Average of quantities of good Y = (20 + 10) / 2 = 15

In mid-point formula,

% changes in quantity demanded for good Y = Y / Average of quantities of good Y

=> % changes in quantity demanded for good Y = (- 10) / 15 = - 0.666

Now, income = New income - Old income = 40,000 - 30,000 = $10,000

Average of income = (30,000 + 40,000) / 2 = 35,000

% changes in income = income / Average of income

=> % changes in income = 10,000 / 35,000 = 0.285

Income elasticity of demand = % changes in quantity demanded for good Y / % changes in income

=> Income elasticity of demand = (- 0.666) / 0.285 = - 2.33

In case of negative income elasticity of demand for a good the goods is an inferior good. As here the income elasticity of demand for good Y is - 2.33 hence here the good Y is an inferior good. Therefore, option a is correct.

Rahul Sunny answered 1 year ago

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