Answer to Question #189338 in Macroeconomics for saboor

Question

. What would you expect to happen to spending on food at home and spending on food in

restaurants during a decline in economic activity? How would income elasticity of

demand help explain these changes? Justify your stance.

Answer 1

Income elasticity of demand refers to the percentage change in quantity demanded with respect to the percentage change in income

 

Spending on food at home would decline and spending on food in restaurants would also decline but the decline in the spending on food in restaurants would be much higher than the decline in spending on food at home.

This is because spending on food in restaurants is a luxury good and spending on food at home is a necessity good.

Luxury good income elasticity of demand is elastic in nature i.e. income elasticity of demand is more than 1. Thus when there is a decline in income, it leads to a proportionally large decline in spending on food in restaurants.

Necessity good income elasticity of demand is inelastic in nature i.e. income elasticity of demand is less than 1. Thus when there is a decline in income, it leads to a proportionally smaller decline in spending on food at home.