Question

If a consumer increases her quantity of ice cream consumed by 100% when her income rises by 25%. Calculate her income elasticity of demand for the ice cream and interpret the result.

Answer 1

Income elasticity E_i = % change in Qd $\div$ % change in income

E_i = 100% $\div$ 25% = 4

Income elasticity of demand for ice cream is 4 and since it is positive, the good is a normal good. And the also the income elasticity is greater than 1. Therefore ice cream comes under the category of luxury goods.