You have the following information on monthly income and quantities consumed of

Question

You have the following information on monthly income and quantities consumed of steaks, magazines, movies and pizzas for a consumer: Quantity purchased per month Monthly income Steaks Magazines Movies Pizzas $ 2000 2 4 6 8 $ 3000 4 6 6 6 Assume that all other variables (including the own prices of these goods) remain constant. 1. Calculate the income elasticity of demand for steaks? 2. Are steaks normal or inferior goods? Use the value of the income elasticity of demand for steaks to answer this question. 3. Calculate the income elasticity of demand for movies 4. Are pizzas normal or inferior goods? Use the value of the income elasticity of demand for steaks to answer this question.

Explanation / Answer

1. income elasticity of demand = (I/Q)(dQ/dI) = (2000/2)(2/1000) = 2 2. steaks are normal goods , since their demand increases with increase in monthly income 3. income elasticity of demand = (I/Q)(dQ/dI) here increase in income is not accompanied by the increase in demand....therefore these are sticky goods with income elasticity of demand = 0 4.pizzas are inferior goods since the consumer tends to substitute pizzas with steaks(thus lowering the demand of pizzas) as his income increases

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