(a) What is income elasticity of demand? The table below shows the various incomes and demand for different commodities. Income (N) Quantity Demanded (kg) A...

Answer Details

(a) Income elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in consumer income: \[E_y=\dfrac{\%\ \text{change in quantity demanded}}{\%\ \text{change in income}}.\]

(b)(i) Between A and B: \(\%\Delta Q=\dfrac{96-120}{120}\times100=-20\%\); \(\%\Delta Y=\dfrac{36{,}000-20{,}000}{20{,}000}\times100=80\%\); \[E_y=\dfrac{-20}{80}=-0.25.\]

(b)(ii) Between C and D: \(\%\Delta Q=\dfrac{200-160}{160}\times100=25\%\); \(\%\Delta Y=\dfrac{44{,}000-40{,}000}{40{,}000}\times100=10\%\); \[E_y=\dfrac{25}{10}=2.5.\]

(b)(iii) Between E and F: \(\%\Delta Q=\dfrac{252-240}{240}\times100=5\%\); \(\%\Delta Y=\dfrac{47{,}000-45{,}000}{45{,}000}\times100=4.44\%\); \[E_y=\dfrac{5}{4.44}=1.13.\]

(c)(i) Between A and B the elasticity is negative (-0.25), so the good is an inferior good (demand falls as income rises).

(c)(ii) Between C and D the elasticity is positive and greater than 1 (2.5), so the good is a normal good, specifically a luxury (superior) good.