Question

As the average hourly wage increases from $22 per hour to $28 per hour, the quantity demanded of Americano coffees increases from 3,000 to 3,450. What is the income elasticity of demand for Americano coffees?

Answer 1

Answer:income elasticity of demand for Americano coffees = 0.55

Explanation:

Income Elasticitity of demand = percentage change in quantity demanded / Percentage change in income

which can easily be calculated using

Income Elasticitity of demand =(New quantity  demanded - old quantity demanded/ old quantity)/(New Income - Old income /old income.

new income = $28

old income=$22

new quantity= 3450

old quantity=3000

Bringing down our formulae

Income Elasticitity of demand =(New quantitry  demanded - old quantity demanded/ old quantity)/(New Income - Old income /old income.

= {(3450-3000) /3000} /{(28-22)/22} =(450/3000) /(6/22) = 0.15/0.2727=0.55

income elasticity of demand for Americano coffees = 0.55

Here , we can see that we have a positive income elasticity of demand therefore Americano coffees is a normal good as an increase in income will lead to a rise in demand.  Also, the income elasticity of demand for this commodity is less than 1, therefore it is also a necessity good.