Written Answer:
Show calculations and respond to questions for the following example. Use either arc convention or the normal % change formula. Specify what you used.
Quantity of
Demand Income
Period 1 100 $25,000
Period 2 125 $35,000
a)% change demand=
b)% change income=
c)income elasticity of demand=
d)elastic or inelastic=
Take a shot.
To calculate the % change in demand, we can use the following formula:
% change in demand = ((New Demand - Old Demand) / Old Demand) * 100
% change in demand = ((125 - 100) / 100) * 100 = 25%
To calculate the % change in income, we can use the same formula:
% change in income = ((New Income - Old Income) / Old Income) * 100
% change in income = ((35,000 - 25,000) / 25,000) * 100 = 40%
To calculate the income elasticity of demand, we can use the following formula:
Income elasticity of demand = (% change in demand) / (% change in income)
Income elasticity of demand = 25% / 40% = 0.625
To determine if the demand is elastic or inelastic, we can compare the absolute value of the income elasticity of demand to 1. If it is less than 1, the demand is inelastic. If it is greater than 1, the demand is elastic.
In this case, the income elasticity of demand is 0.625, which is less than 1. Therefore, the demand is considered inelastic.