suppose the income elasticity of demand for toys is +2.00. this means that a. a 10 percent increase in income will increase the purchase of toys by 20 percent b. a 10 percent increase in income will increase the purchase of toys by 2 percent c. a 10 percent increase in income will decrease the purchase of toys by 2 percent d. toys are an inferior good.
Income (I) elasticity is (%change Q)/(% change I).
So, you have (%change Q)/(10%) = 2.0 So, (%change Q) must be......
The correct answer is option a. A 10 percent increase in income will increase the purchase of toys by 20 percent.
Income elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in income. In this case, an income elasticity of demand of +2.00 means that a 1 percent increase in income will result in a 2 percent increase in the quantity of toys demanded. Therefore, a 10 percent increase in income will lead to a 20 percent increase in the purchase of toys.
To determine the correct answer, we need to understand the concept of income elasticity of demand.
Income elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in income. It is calculated by dividing the percentage change in the quantity demanded of a good by the percentage change in income.
In this case, a positive value of income elasticity of demand (+2.00) indicates that the good is a normal good. This means that as income increases, the demand for toys increases.
Now, let's consider the options:
a) A 10 percent increase in income will increase the purchase of toys by 20 percent.
To determine if this is true, we can use the formula: Income Elasticity of Demand = (% change in quantity demanded) / (% change in income)
If income elasticity is +2.00, it implies that a 1% increase in income will lead to a 2% increase in quantity demanded. Therefore, a 10% increase in income will result in a 20% increase in quantity demanded. So, option a) is correct.
b) A 10 percent increase in income will increase the purchase of toys by 2 percent.
As explained earlier, the income elasticity of demand is 2.00, which implies that a 1% increase in income leads to a 2% increase in quantity demanded. Therefore, option b) is incorrect.
c) A 10 percent increase in income will decrease the purchase of toys by 2 percent.
Since the income elasticity of demand is positive, it means that an increase in income will lead to an increase in the demand for toys. Therefore, option c) is incorrect.
d) Toys are an inferior good.
The income elasticity of demand for an inferior good is negative. Since the income elasticity in this case is positive, it indicates that toys are a normal good. Hence, option d) is incorrect.
Therefore, the correct answer is a) A 10 percent increase in income will increase the purchase of toys by 20 percent.