Answer to Question #206309 in Macroeconomics for docho

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

Solution:

Income elasticity of demand = $\frac{\%\triangle Qd}{\%\triangle Income}$

$\%\triangle Qd = 100\%$

$\%\triangle Income = 25\%$

 

Income elasticity of demand = $\frac{100\%}{25\%} = 4$

Income elasticity of demand = 4

 

The income elasticity of demand is 4, which is positive meaning that it is a normal good, that is, as income increases, the demand for the product increases. Since the income elasticity of demand is greater than 1, therefore, it means ice cream is a luxury product and income elastic. This means that consumer demand is more responsive to a change in income.