A consumer initially maximizes utility at point A with income of Y = $120 spent

Question

A consumer initially maximizes utility at point A with income of Y = $120 spent on coffee and biscuits. Then, suppose income increases, shifting the budget constraint from L to L2, where the consumer maximizes utility at bundle B 14.00 12.00 10.00 8.00 Using the new level of income, calculate the income elasticity of coffee (5offee between bundle A and bundle B. ICC coffee (Enter a numeric response using a real number rounded to two decimal places.) 6.00- 4.00 2.00 0.00T .A 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 Coffee

Explanation / Answer

Original data: Demand for Coffee: 4.50 units Demand for Biscuits: 3.5 units Income = 120 price of Biscuits : 120/8 = 15 Price of Coffee = 120 / 8 = 15 New data: Demand for coffee: 6.5 units Demand for Biscuits: 5.5 units New income = 6.5*15+ 5.5 *15 = 180 Change in income = 180-120 = 60 % change in income = 60 / 120 *100 = 50% Change in demand of coffee: 6.5-4.5 = 2.00 % change in demand of coffee: 2.00 /4.50 *100 = 44.44% Income elasticity of demand = % change in demand of coffee / % change in income 44.44% /50% = 0.89

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