Question

Solve the following problems on Income elasticity of demand and classify the nature of elasticity and good. 3)Suppose the initial income of a consumer is Rs.2000/- per week and he purchases 20 units of a commodity. In the next month the income of the consumer rises to Rs.3000/- per week, as a result the demand rises to 40 units. 4) Suppose the initial income of a consumer is Rs.2000/- per week and he purchases 20 units of a commodity. In the next month the income of the consumer rises to Rs.3000/- per week, as a result the demand rises to 25 units. 5) Suppose the initial income of a consumer is Rs.2000/- per week and he purchases 20 units of a commodity. In the next month the income of the consumer rises to Rs.3000/- per week, as a result the demand falls to 10 units.

Answer 1

Income elasticity of demand (YED)=$\frac{\%change in Q}{\%change in P}$

(3)

(YED)=$\frac{\%change in Q}{\%change in P}$=$\frac{\frac{40-20}{40}\times 100\%}{\frac{1000}{3000}\times100\%}=1.5$

Since the value is positive and greater than 1, the good is highly elastic. This good is a luxury good since its demand increases as soon as it becomes affordable.

(4)

(YED)=$\frac{\%change in Q}{\%change in P}$=$\frac{\frac{25-20}{25}\times 100\%}{\frac{1000}{3000}\times100\%}=0.6$

A change in the income has not changed the demand of the good substantially therefore the good is inelastic.This good is a basic good since its demand is less sensitive to a change in income

(5)

(YED)=$\frac{\%change in Q}{\%change in P}$=$\frac{\frac{10-20}{20}\times 100\%}{\frac{1000}{3000}\times100\%}=-1.5$

A change in the income has changed the demand of the good negatively and therefore the good is inelastic.This good is an inferior good since its demand a rise in income has led to a decrease in demand of the good.