Question

Calculate Income Elasticity of Demand Question Suppose that when the price of cream cheese rises by 10%, the quantity of bagels demanded at the current price of bagels falls by 3%. When income rises by 10%, the quantity of bagels demanded at the current price increases by 1%. Calculate the income elasticity of demand for bagels. Round your answer to the nearest tenth. Your answer may be a positive or negative number.

Answer 1

Answer:

eY is positive +0.1 therefore bagels are a normal good.

Step-by-step explanation:

Given data:

when, 10% rise in cheese price,  3% fall in bagels quantity observed

when, 10% rise in income,  1% fall in bagels quantity observed

from formula for cross price elasticity of demand, determine $e_{AB}$

$e_{AB} = \frac{(−3\%}{(10\%)} = −0.3.$

As,  eAB is negative, bagels $ cream cheese are complements.

By formula for income elasticity of demand,

we find that$eY= \frac{(+1\%)}{(10\%)} = +0.1.$

Since eYis positive, bagels are a normal good.