As income levels rose moderately last year in the San Jose area, it was observed
ID: 1193004 • Letter: A
Question
As income levels rose moderately last year in the San Jose area, it was observed by local realtors that housing sales increased substantially. It is clear from this information that, everything else held constant, the income elasticity of demand for houses is _____.
a.
negative and relatively high
b.
negative and relatively low
c.
positive and relatively high
d.
positive and relatively low
e.
neither positive nor negative
a.
negative and relatively high
b.
negative and relatively low
c.
positive and relatively high
d.
positive and relatively low
e.
neither positive nor negative
Explanation / Answer
Income elasticity of demand measure the effect of change in income on quantity demanded. It is given by the equation - Percentage change in Quantity demanded / Percentage change in income.
As income levels rose moderately last year in the San Jose area, it was observed by local realtors that housing sales increased substantially. It is clear from this information that, everything else held constant, the income elasticity of demand for houses is positive and relatively high.
The income elasticity is positive because change in income is increasing the sales of houses. It is relatively high because change in income is small while its effect on change in quantity demanded of houses is substantial.
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