Question

Sylvia's annual salary increases from $100,000 to $109,500, and she decides to increase the number of vacations she takes per year from three to four.
Calculate her income elasticity of demand for vacations.

Answer 1

Answer:

Income elasticity of demand = 3.150

Explanation:

given data

annual salary increases =  $100,000 to $109,500

increase number of vacations = 3 to 4

solution

we get here income elasticity of demand for vacations by mid point method that is

income elasticity of demand for vacations = (change in the number of vacations ÷ average vacations) ÷ (change in annual salary ÷  average annual salary)   .......................1

here

change in vacations is  = 4 - 3

change in vacations = 1

and

average vacations will be = $\frac{4+3}{2}$  

average vacations = 3.5

so

here change in annual salary will be

change in annual salary = 109,500 - 100,000

change in annual salary = 9,500

and

average annual salary will be

average annual salary = $\frac{109500 + 100,000}{2}$  

average annual salary = 104750

so

now put all value in equation 1 we get

Income elasticity of demand = $\frac{\frac{1}{3.5}}{\frac{9500}{104750}}$  

Income elasticity of demand = 3.150