Question

ABC’s income has increased from P 20,000 to P 30,000 per month. Because of this, his consumption for fruits has increased by 20%. Compute the income elasticity and determine the type of good.

Answer 1

By the definition of the income elasticity of demand we have:

$$E_Y=\dfrac{\%\Delta Q}{\%\Delta Y}=\dfrac{\%\Delta Q}{\dfrac{Y_2-Y_1}{Y_1}\cdot100\%},$$ $$E_Y=\dfrac{20\%}{\dfrac{30000-20000}{20000}\cdot100\%}=0.4$$

As we can see from calculations, the income elasticity of demand is positive and lies between 0 and +1, therefore it is a normal good (necessity).