Question

Sally’s income has increased by 10% and she decides to change her consumption of macaroni and cheese from 10 boxes to 8 boxes. Her income elasticity of demand is ____ and the good is a _____ type of good.

Answer 1

Answer:

-2; Inferior good

Step-by-step explanation:

Given that,

Initial Quantity = 10 boxes

New Quantity = 8 boxes

Percentage increase in Sally's income = 10%

Change in consumption:

= 8 boxes - 10 boxes

= - 2 boxes

Percentage change in quantity demanded:

= (Change in quantity demanded ÷ Initial quantity) × 100

= (-2 ÷ 10) × 100

= - 20%

Therefore,

Income elasticity of demand:

= percentage change in quantity demanded ÷ Percentage change in income

= - 20% ÷ 10

= -2

Inferior goods are generally have a negative income elasticity of demand which means that an increase in the income of the consumer will lead to reduce the quantity demanded for inferior good and vice versa.

Hence, the good is a inferior type of good.