Question

Blake eats two bags of potato chips each day. Blake's hourly wage increases from $7 to $15 , and he decides to stop eating generic chips and instead eats a name-brand potato chip. Use the midpoint method to calculate Blake's income elasticity of demand for generic potato chips. Round your answer to two decimal places.

Answer 1

Answer:

The income elasticity of demand for generic potato chips is -2.75 and as the income elasticity of demand for generic potato chips is negative, generic potato chips is an inferior good

Explanation:

With increase in income of Blake from $7(I1) hourly wage to $15(I2) hourly wage, quantity demanded for generic potato chips falls from 2 bags (Q1) to 0 (Q2).

Income elasticity of demand for generic potato chips = (Q2-Q1)/[(Q1+Q2)/2] / (I2-I1)/[(I1+I2)/2]

= (0-2)/[(0+2)/2]/ ($15-$7)/[($15+$7)/2]

= (-2/1) / (8/11)

= -11/4

= - 2.75

Therefore, The income elasticity of demand for generic potato chips is -2.75 and as the income elasticity of demand for generic potato chips is negative, generic potato chips is an inferior good.