Question

Suppose that when Mary’s income increases from RM56,000 to RM60,000 per year, her

purchase of good B decreased from 10 units to 5 units.

i. Calculate the coefficient of income elasticity of demand.

ii. Interpret the value of the coefficient above.

Answer 1

i) percentage change in income =$\frac{60000-56000}{56000}\times 100\%=7.143\%$

Percentage change in quantity demanded $=\frac{5-10}{10}\times 100\%=-50\%$

Income elasticity of demand $=$ percentage change in quantity demanded$/$ percentage change in income$=\frac{7.143}{-50}=-0.14286$

ii) The value of the coefficient is negative showing that good B is an inferior good.