Question

Suppose a household’s income increases from $2500 to $3000 and quantity demanded changes from 190 to 150. What is the income elasticity?
a.
0.6


b.
$500


c.
-1.05


d.
2.5

Answer 1

The income elasticity for the household is -1.05.

What is the income elasticity?

Income elasticity measures how quantity demanded changes when there is a change in the income of a person / household

Income elasticity = percentage change in quantity demanded / percentage change in income

• percentage change in income = (3000 / 2500) - 1 = 0.2 = 20%
• percentage change in quantity demanded =( 150 /190) - 1 = -0.21 = -21%

Income elasticity = -21% / 20 = -1.05

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