Becky really likes Macaroni Grill but can only afford to eat out 4 times a year. Her boss gives small raises, so this year she receives 4% raise. She decides that a 4% raise is enough to warrant going out 1 more trip per year to Marconi girl. Calculate for restaurants the income elasticity of demand?
To calculate the income elasticity of demand for restaurants in Becky's case, we need to determine the percentage change in the quantity demanded of restaurant visits (due to her income increase) divided by the percentage change in her income.
First, let's determine the initial number of times Becky goes to Macaroni Grill per year. We know that she can afford to eat out at Macaroni Grill only 4 times a year.
Next, let's calculate the new number of times she can afford to go to Macaroni Grill after receiving a 4% raise. Since she receives a 4% raise, her income will increase by 4%. We can calculate the new number of times she can afford to go out by multiplying the initial number of visits (4) by (1 + 0.04) to account for the 4% increase:
New number of times she can afford to go out = 4 * (1 + 0.04) = 4 * 1.04 = 4.16 (approximately)
Now, let's calculate the percentage change in the quantity demanded. The initial quantity is 4, and the new quantity is 4.16. We can calculate the percentage change as follows:
Percentage change in quantity demanded = ((new quantity - initial quantity) / initial quantity) * 100
= ((4.16 - 4) / 4) * 100
= (0.16 / 4) * 100
= 4%
Finally, let's calculate the income elasticity of demand using the percentage change in the quantity demanded and the percentage change in income:
Income elasticity of demand = (percentage change in quantity demanded) / (percentage change in income)
= 4% / 4%
= 1
Therefore, the income elasticity of demand for restaurants, in this case, is 1. This suggests that the demand for restaurant visits is unitary elastic with respect to income, meaning that a 1% increase in income will result in a 1% increase in the quantity of visits to restaurants.