Answer to Question #240615 in Economics of Enterprise for nete

Question

Calculate your income elasticity of demand as your income increases from 10 000 to 12 000 if the price is 12, and the price is16. 

Answer 1

Solution:

At the price of $12, when income increases from $10,000 to $12,000, the quantity demanded increases from 24 to 30 units.

Income elasticity of demand = $=\frac{\%\;change\; in\; quantity\; demanded}{\%\; change\; in\; Income}$

YEd = $\frac{Q_{2} -Q_{1}}{(Q_{2}+Q_{1})/2 } \div \frac{I_{2} -I_{1}}{(I_{2}+I_{1})/2 }$

Q₁ = 24                                                I₁ = 10,000

Q₂ = 30                                                I₂ = 12,000

YEd = $\frac{24 - 30}{(24+30)/2 } \div \frac{12,000 -10,000}{(680+440)/2 }$

= $\frac{6}{27 } \div \frac{2,000 }{11,000 } = \frac{0.22}{0.18 }= 1.22$ 6/27 / 2,000/11,000 = 0.22/0.18 = 1.22

Income elasticity of demand (YEd) = 1.22

 

At the price of $16, when income increases from $10,000 to $12,000, the quantity demanded increases from 8 to 12 units.

Income elasticity of demand = $=\frac{\%\;change\; in\; quantity\; demanded}{\%\; change\; in\; Income}$

YEd = $\frac{Q_{2} -Q_{1}}{(Q_{2}+Q_{1})/2 } \div \frac{I_{2} -I_{1}}{(I_{2}+I_{1})/2 }$

Q₁ = 8                                               I₁ = 10,000

Q₂ = 12                                             I₂ = 12,000

YEd = $\frac{12 - 8}{(12+8)/2 } \div \frac{12,000 -10,000}{(12,000+440)/2 }$

= $\frac{4}{10 } \div \frac{2,000 }{11,000 } = \frac{0.4}{0.18 }= 2.22$

Income elasticity of demand (YEd) = 2.22