Question

Suppose that demand for automobiles increases by 25% when consumers' incomes increase by 20%. what is the income elasticity of demand for automobiles? round your answer to two decimal places.

Answer 1

Income elasticity of demand is a measure of responsiveness of the quantity of goods or services demanded to a change in the income of the people demanding the good. It is calculated as the ratio of the percentage change in the quantity demanded to the percentage change in income. 
In this case, percentage change in quantity demanded is 25% and percentange change in income is 20%
Therefore, income elasticity = 25/20
                                             =  1.25