Question

(a) Suppose the GDP per capita (income) has increased from $5000 to $10,000, whereas the demand for luxury apartments has increased from 1000 to 2000, whereas the demand for burgers has increased from 10,000 to 12,000. Calculate the income elasticity of demand for apartments and burgers

Answer 1

Income elasticity of demand=$\frac{Percentage\ change\ in\ quantity\ demand}{Percentage\ change\ in\ income}$

$=\frac{(D_1-D_0)/(D_1+D_0)}{I_1-I_0)/(I_1+I_0)}$

For apartments:

Income elasticity of demand=$\frac{(2000-1000)/(2000+1000)}{10000-5000)/(10000+5000)}$

=1

For burgers;

Income elasticity of demand=$=\frac{(12000-10000)/(12000+10000)}{10000-5000)/(10000+5000)}$

=0.2727