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