Question

3. If a 5% income decrease led to a 6% increase in quantity demanded for coffee. a. Calculate the income elasticity of coffee . (4 pts.) b. Based on the value you calculated, coffee is __________________ and ___________________ (2 pts.) c. Name another good that might have a similar value of elasticity. Explain. (4 pts.)

Answer 1

Income Elasticity is defined as the degree of responsiveness of change in quantity demanded due to change in income.

that is how quantity demanded responses when the income of consumer changes.

if the value of e

1) e= 0 then its neutral

2) the value is between 0 and 1 the the good is normal good

3) the value of e more than 1 then its a luxury good

4) if the value is negative, less than 0 the good is inferior good.
f Income decreases by 5% . Due to which Quantity demanded of coffee increases by 6% a) Income Elasticity of coffee = ey change in quentity demanded % Chenge in podo Income ey is defined as the change in quantity demanded due to change in its prie ey ey =-1.2 coffee is inclestu ie. Negative oo The demand of 1. Income elasticity - INICI Bo Based on the value calculated, coffee is incane inelestic and inferior good Inferior Goods are those goods which response negatively in comparison to normel Goods. Normal Goods are the goods whose consumptions increases as the income or the pas increeses and to inferior goods vice versa.

c) Any Good for example - co Any Good whose consumption increases a wan fall in income comes under this category example - consumption of cheaper cars. As the income of consumer increases, person bugs luxury cess. But if the income of consumer decreases consumer shift to cheeper cars or even second hand ones. UUU