Question

Shawna wins the lottery and her income increases by 60 percent. she used to buy 10 pints of cottage cheese per month and now she buys 12 pints. her income elasticity of demand for cottage cheese is ________, making it a(n) ________ good.

Answer 1

Answer: Her income elasticity of demand for cottage cheese is 0.3333 making it a normal and necessary good.

The income elasticity  of demand is given by :

$\mathbf{YED = \frac{percentage change in demand}{percentage change in income}}$

The percentage change in income is given as 60%. We calculate the percentage change in quantity demanded as follows:

$\mathbf{percentage change in quantity demanded = \frac{Q_{1}-Q_{0}}{Q_{0}}}$

$\mathbf{percentage change in quantity demanded = \frac{12-10}{10}}$

$\mathbf{percentage change in quantity demanded = 0.2}$

Substituting the value above in the income elasticity demand formula we get,

$\mathbf{YED = \frac{0.20}{0.60}}$

YED = 0.33333

Since the income elasticity is positive, and since Shawna buys more cottage cheese after an increase in income, we can classify this good as a normal good.

Since the income elasticity is between 0 and 1 we can also conclude that cottage cheese is also a essential good or a necessity.