Question

Consider the markets for mobile and landline telephone service. Suppose that when the average income of residents of Plainville is $55,000 per year, the quantity demanded of landline telephone service is 12,500 and the quantity demanded of mobile service is 28,000. Suppose that when the price of mobile service rises from $100 to $120 per month, the quantity demanded of landline service decreases to 11,000. Suppose also that when the average income increases to $60,000, the quantity demanded of mobile service increases to 33,000. Refer to Scenario 5-6. Considering the income elasticity, what type of good is mobile telephone service?

Answer 1

Answer:

Normal goods

Explanation:

The computation of the income elasticity of demand is shown below:

Income elasticity is  

= (change in quantity ÷ average quantity) ÷ (change in income ÷ average income)

= {(33,000 - 28000) ÷ ((33,000 + 28,000) ÷ 2)} ÷ {($60,000 - $55000) ÷ (($60,000 + $55,000) ÷ 2)}

= (5,000 ÷ 30,500) ÷ ($5,000 ÷ $57,500)

= 0.1639 ÷ 0.0869

= 1.88

As we can see that the income elasticity of demand comes in a positive so it indicates  normal goods