Suppose your income increases from $60,000 to $72,000, and your quantity demanded of a product increases from 4 to 5. What is the value of the income elasticity of demand?
To calculate the income elasticity of demand, we need to find the percentage change in quantity demanded and the percentage change in income. The formula for income elasticity of demand is:
Income elasticity of demand = (Percentage change in quantity demanded) / (Percentage change in income)
Let's calculate the percentage change in quantity demanded first:
Percentage change in quantity demanded = (New quantity demanded - Initial quantity demanded) / Initial quantity demanded * 100
In this case, the initial quantity demanded is 4 and the new quantity demanded is 5:
Percentage change in quantity demanded = (5 - 4) / 4 * 100
Percentage change in quantity demanded = 1 / 4 * 100
Percentage change in quantity demanded = 25%
Now let's calculate the percentage change in income:
Percentage change in income = (New income - Initial income) / Initial income * 100
In this case, the initial income is $60,000 and the new income is $72,000:
Percentage change in income = ($72,000 - $60,000) / $60,000 * 100
Percentage change in income = $12,000 / $60,000 * 100
Percentage change in income = 0.2 * 100
Percentage change in income = 20%
Now we can calculate the income elasticity of demand:
Income elasticity of demand = (Percentage change in quantity demanded) / (Percentage change in income)
Income elasticity of demand = 25% / 20%
Income elasticity of demand ≈ 1.25
Therefore, the value of the income elasticity of demand is approximately 1.25.
To calculate the income elasticity of demand, you need to use the following formula:
Income Elasticity of Demand = (Percentage change in quantity demanded) / (Percentage change in income)
First, calculate the percentage change in quantity demanded:
Percentage change in quantity demanded = [(New quantity demanded - Old quantity demanded) / Old quantity demanded] x 100
Percentage change in quantity demanded = [(5 - 4) / 4] x 100 = 25%
Next, calculate the percentage change in income:
Percentage change in income = [(New income - Old income) / Old income] x 100
Percentage change in income = [(72000 - 60000) / 60000] x 100 = 20%
Now, substitute these values into the formula:
Income Elasticity of Demand = (Percentage change in quantity demanded) / (Percentage change in income)
Income Elasticity of Demand = 25% / 20% = 1.25
Therefore, the income elasticity of demand is 1.25.