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

Given, percentage change in quantity = 100%

Also, the percentage increase in income = 25% lncome elasticity of demand is given by

Income Elasticity =$\frac {\%change in quantity} {\%change in income}$

Income Elasticity = $\frac {100} {25} = 4$

Thus, the income elasticity of demand for icecream is 4. This means that when the income of the consumer increases by 1%, the consumption of icecream for that consumer increases by 4%.