Answer to Question #261584 in Microeconomics for Fifi

Question

The manager of a Cape Town superette carries a stock of jive soft drinks. The country has experienced an economic recession which yields an anticipated income decrease of 6%.

As a result, the income elasticity of demand for this product is estimated to be - 2.5.

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

Answer 1

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 = $15\%$