Question

Suppose the demand for good X is given by Qd = 300 – 5Px - 5Py + 20 I where Px is the price of good X. Py is the price of some other good Y, and I is income. Assume that Px is currently $1, Py is currently $2, and I is currently $50.The income elasticity is

Answer 1

$Qd=300-5×1-5×2+20×50;$$Qd=$ $1285;$

$E$ ^I_d$=(Qd)'$_I$×\frac {I}{Qd};$

$Qd'$_I$=(300-5Px-5Py+20I)'$_I$=20;$

$E$ ^I_d$=20×\frac{50}{1285};$

$E$ ^I_d$=0.78;$

Answer: The income elasticity is 0.78.