Question

Suppose that the income elasticity of demand for new houses is 2.3. If consumer incomes increase by 2 percent, you could expect the quantity of new houses to

Answer 1

With income elasticity of demand being 2.1 , that is, greater than unity, it implies that the new houses are luxuries.

This means that the new houses are income elastic and consumer demand is more responsive to to a change in income.

Income elasticity is given by the percentage change in quantity demanded divided by the percentage change in income.

$\therefore$ $2.3=\frac{x}{2}$

$\implies$ $x=2.3\times2$

$x=4.6$

$\therefore$ the quantity of new houses will increase by 4.6 percent.