Question

Suppose that consumers' incomes increase 12 percent, which results in a 0.6 percent increase in consumption of farm goods at current prices. What is the income elasticity of the demand for the farm?

Answer 1

Income elasticity of the demand $= \frac{Percentage \; change \; in \; demand}{Percentage \; change \; in \; income}$

Percentage change in income is 12%, and percentage change in demand is 0.6%.

Income elasticity of the demand $= \frac{0.6}{12} = 0.05$

The income elasticity of demand for farm goods is 0.05.