Answer to Question #160676 in Microeconomics for sam

Question

If people always spend 25 per cent of their incomes on housing, then the income elasticity of demand for housing is

Answer 1

$\bold {Answer}$

The income elasticity of demand for housing is inelastic

$\bold {Explanation}$

Income elasticity of demand is the responsiveness of quantity demanded to changes in disposable income. Quantity of housing consumed is fixed at 25% of income. Because of this, the percentage change in quantity of housing consumed is always less than percentage change in income. As an example, when income increases by 50%, quantity of housing consumed increases by 12.5%(50% × 0.25); when income increases by 75%, quantity of housing consumed increases by 18.75% (75% × 0.25), and so on. In each case, percentage change in income exceeds percentage in quantity of housing consumed; hence, income elasticity of demand is inelastic.