Answer to Question #206283 in Macroeconomics for JALSORESA

Question

1. 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 of demand is an economic measure of how responsive the quantity demand for a good or service is to a change in income.

It is calculated as the percentage change in quantity demanded divided by the percentage change in the income.

E_d = 100%/25% =4

The income elasticity of demand is high positive implying that it's highly responsive.  An increase in income is accompanied by a relatively larger increase in the quantity demanded of ice cream.