Question

Suppose the demand for roses increases from 500 to 600 stems when income rises from $10,000 to $20,000. Income elasticity for roses is:__________

Answer 1

Answer:

Demand   Income    % Δ in Demand    % Δ in Income   Elasticity

500            10000

600            20000          18.18%                  66.67%             0.2727

The formula for midpoint elasticity = ((600-500)/((600+500)/2))/((20000-10000)/((20000+10000)/2)) = 0.2727

As the elasticity value is 0.2727 is less than 1, the good is slightly elastic and the good is normal good as the demand increases with the increase in income.