Answer to Question #256596 in Microeconomics for Akhona Klanisi

Question

3.

The manager of a Cape Town superette carries a stock of Jive soft drinks. The country experiences an economic recession which yields an anticipated consumer income decrease of 6 %. As a result, the income elasticity of demand for this product is estimated to be –2.5.

(a) Calculate the percentage change in the quantity of your soft drink orders required to accommodate the new demand without a surplus or shortage of inventory.

(b) What does the elasticity coefficient of –2.5 reveal?

Answer 1

Solution:

a.). Income elasticity of demand (YED) = Percentage change in qty demanded/percentage change in income.

$-2.5 = \frac{\triangle Qd}{-6\%}$

ΔQd = -6% $\times$ -2.5 = $15\%$

The percentage change in quantity demanded = $15\%$

 

b.). The elasticity coefficient of -2.5 means that YED is greater than 1 and thus highly elastic. Therefore, it means that consumers are highly responsive to income changes.