Answer to Question #206597 in Microeconomics for abiy

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. (2marks)

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 for ice cream is 4, which is positive and greater than 1 meaning that it is a luxury good and income elastic, that is, as income increases, the demand for the product increases massively. Therefore, this means that consumer demand is more responsive to a change in income.