Question

A consumer's weekly income is $300 and the consumer buys 5 bars of chocolate per week. When income increases to $330, the consumer buys 6 bars per week. What is the income elasticity of demand for chocolate by this consumer? Based on this information, would you infer that chocolate is a normal or inferior good?
A. 1; inferior
B. 0.5; normal
C. 1; normal
D. 0.5; inferior
E. 2; normal
F. 2; inferior
G. None of the above

Answer 1

Answer:

The correct answer is option E.

Explanation:

Income elasticity of demand measures the change in quantity demanded of a product because of a change in the income of the consumer. It is calculated as a ratio of change in quantity demanded and change in income.  

At the income level of $300, the consumers buy 5 bars of chocolate. When the income increases to $330, the consumer buys 6 bars of chocolate.  

The income elasticity of demand is  

= $\frac{\Delta Q}{\Delta Y}$

= $\frac{\frac{6-5}{5} }{\frac{330-300}{300} }$

= $\frac{\frac{1}{5} }{\frac{30}{300} }$

= $\frac{0.2}{0.1}$

= 2

Since the income elasticity of demand is positive, this implies that chocolate is a normal good.