Question

Suppose that when the average college student's income is $10,000 per year, the annual quantity demanded of Patty's Pizza is 50 and the annual quantity demanded of Sue's Subs is 80. Suppose that when the price of Patty's Pizza increases from $8 to $10 per pie, the quantity demanded of Sue's Subs increases from 80 to 100. Suppose also that when the average student's income increases to $12,000 per year, the annual quantity demanded of Patty's Pizza increases from 50 to 60.Refer to Scenario 5-1. Using the midpoint method, what is the income elasticity of demand for pizza and what does the value indicate about the demand for pizza?A. The income elasticity is 1 so pizza is a normal good.B. The income elasticity is -1 so pizza is an inferior good.C. The income elasticity is 0.18 so pizza is a normal good.D. The income elasticity is 1 so pizza is unitary elastic.

Answer 1

Answer:

Explanation:

Pizza quantity Change = 60-50 = 10

Income change = $12000 - $10000 = $2000

Mid point of Quantity of Pizza = (50+60)/2 = 55

Mid point of income =  ($12000 + $10000)/2 = $11000

Income elasticity = 10*11,000/2000*55 = 110,000/110,000=1

Pizza is a unit elastic normal good, because percentage change in income = % change in pizza quantity