Answer to Question #264158 in Microeconomics for ann

Question

If income elasticity of demand of good X is 0.89, what will happen to equilibrium price if there is an increase in income of consumers? Draw a diagram to support your answer. 

Answer 1

The income elasticity of 0.89 depicts normal goods. There exists a direct relation between demand and the income levels of a person.

An increase in income level would tend to cause an increase in demand for normal products. When there is a rise in demand, the demand curve would shift towards the right.

The equilibrium price would tend to rise from P to P1 as consumers would be demanding more products more due to which producers would be raising the price levels. This would lead the equilibrium quantity to increase from Q to Q1 as well.

The graph is being depicted below: