Question

Using the midpoint method to perform the calculation when the price of a T-shirt is $4, the income elasticity of demand when the average tourist income increases from $20,000 to $30,000 is ___. When the price of a T-shirt is $7, for the same change in income, the income elasticity is

Answer 1

Answer:

The income elasticity is 0.73 as shown in the calculation below

Explanation:

The formula foe mid-point income elasticity of demand is:

% change in income/% change in price

That is (Y2-Y1/(Y1+Y2)*100/2)/(P2-P1)/P1+P2/2)*100

P1=old price'

P2=new price

Y1 =old income

Y2=new income

(30000-20000)/(20000+30000)/2*100=40%

(7-4)/(7+4)/2)*100=54.5%

Hence income elasticity of demand  =40%/54.5%=0.73