Median income in a country rises by $5000 per year. The price of good X falls by $4. Quantity demanded for good x falls by 15,000 units per year. What can we say with good X?
To understand the relationship between the changes in median income and the price of good X, we need to analyze the concept of income elasticity of demand and price elasticity of demand.
Income elasticity of demand (Ey) measures how sensitive the quantity demanded of a good is to changes in income. It can be calculated by dividing the percentage change in the quantity demanded of a good by the percentage change in income.
Price elasticity of demand (Ep) measures how sensitive the quantity demanded of a good is to changes in its price. It can be calculated by dividing the percentage change in the quantity demanded of a good by the percentage change in price.
However, without specific numerical values for the initial income, the initial price, and the initial quantity demanded of good X, we cannot calculate the exact values of the income elasticity or price elasticity in this case.
Given the information provided, we can make some general observations based on economic theory:
1. Income Elasticity of Demand (Ey):
- If the median income in a country rises by $5000 per year, and the quantity demanded for good X falls by 15,000 units per year, it suggests that good X may have a negative income elasticity of demand.
- A negative income elasticity of demand (-Ey) implies that the good is an inferior good, meaning that as income increases, the quantity demanded of the good decreases.
2. Price Elasticity of Demand (Ep):
- If the price of good X falls by $4, and the quantity demanded for good X falls by 15,000 units per year, it suggests that good X may have a relatively inelastic demand.
- A relatively inelastic demand (|Ep| < 1) indicates that a change in price has a relatively smaller impact on the quantity demanded of the good.
Without more specific information, we cannot determine the exact magnitude of the income elasticity of demand or price elasticity of demand for good X. However, the given information suggests that good X may be an inferior good with a relatively inelastic demand.