Answer to Question #272202 in Microeconomics for Zara

Question

Suppose the GDP per capita (income) has increased from $5000 to $10,000, whereas the demand for luxury apartments has increased from 1000 to 2000, whereas the demand for burgers has increased from 10,000 to 12,000. Calculate the income elasticity of demand for apartments and burgers

Answer 1

Solution:

Income elasticity for demand (YED) = $=\frac{\%\;change\; in\; quantity\; demanded}{\%\; change\; in\; income}$

 

Income elasticity for demand (YED) = $\frac{Q_{2} -Q_{1}}{(Q_{2}+Q_{1})/2 } \div \frac{I_{2} -I_{1}}{(I_{2}+I_{1})/2 }$

 

Income elasticity for demand (YED) for apartments:

Q₁ = 1000                                  I₁ = 5,000

Q₂ = 2000                                  I₂ = 10,000

Income elasticity for demand (YED) = $\frac{2000 -1000}{(2000+1000)/2 } \div \frac{10,000 -5,000}{(10,000+5,000)/2 } = \frac{1000}{1500} \div\frac{5,000}{7,500} = \frac{0.67}{0.67} = 1$

Income elasticity for demand (YED) for apartments = 1

Income elasticity for demand (YED) for burgers:

Q₁ = 10000                                  I₁ = 5,000

Q₂ = 12000                                  I₂ = 10,000

Income elasticity for demand (YED) = $\frac{12000 -10000}{(12000+10000)/2 } \div \frac{10,000 -5,000}{(10,000+5,000)/2 } = \frac{2000}{11000} \div\frac{5,000}{7,500} = \frac{0.18}{0.67} = 0.27$

Income elasticity for demand (YED) for burgers = 0.27