Answer to Question #88569 in Microeconomics for fgj

Question

Assume that you decide to spend a quarter of your income on clothes. What is (a) your income elasticity of demand; (b) your price elasticity of demand?

Answer 1

(a) Your income elasticity of demand;

The income elasticity of demand=1

Income elasticity of demand refers to sensitivity of quantity demanded for a particular product to change in income of consumers who purchase the product, with all other things being constant. It measures relationship between change in the quantity demanded and the change in real income.

Therefore, assuming that one decides to spend a quarter of his or her income on clothes, then the income elasticity of the individual is one. This is because, if the person can spend a quarter of his or her income on clothes, this means that percentage of change in his or her quantity of clothes must be equal to his or her percentage change in real income. Thus, it is a positive relationship.

(b) Your price elasticity of demand?

The price elasticity of demand=1

Price elasticity of demand refers to responsiveness in change in quantity demanded of a good in relation to changes in its price. It measure responsiveness of demand as a result of change in price of a good. Thus, in this case, the price elasticity of demand is one. This is because, each percentage increase in clothes price will lead to his or her reduction in quantity of the cloth purchased by similar percentage. Thus, the relationship is also positive.