Calculate the income elasticities of demand for the following: a. Income rises b

Question

Calculate the income elasticities of demand for the following:

a. Income rises by 5 percent; demand decreases by 5 percent.

Instructions:Round your answer to 2 decimal places. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. .

b. Income rises from $75,000 to $90,000; demand decreases (at a constant price) from 55 to 50.

Instructions: Round your answer to 2 decimal places. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. .

Explanation / Answer

a. EI = % change in Quantity demanded/% change in Income

= -5/5

= -1

b. EI = (Q2 - Q1)/Q1*(I2 -I1)/I1

= (50 - 55)/50*(90,000 - 75000)/75000

= -0.1/0.2 = -0.5

So Ei = -0.5

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