Question

Which is true about the relationship between income and food expenditures for households talked about in poor economics with income elasticity of food less than 1. for a family of 3 that made $2,000 a year in 2018 and $3,000 a year in 2019. It spent $1,000 a year on food in 2018

		In 2019 we would expect the family to spend more than $1,000 but less than $1,500
		We would expect them to spend less than $1,000 on food
		We would expect them to spend $1,500 a year on food
		We would expect them to spend more than $1,500 on food

Answer 1

Answer is A.

Income elasticity of demand is less then one, it means increase in food expenditure is less then the increase in income.

Here increase in income is $1000. In 2018 income was 2000 and in 2019 income is $3000. In 2018 food expenditure was $1000.

So in 2019 food expenditure should be $1000+ due to increase in income. So food expenditure in 2019 should be greater then $1000 but less then $1500 because less than half of total income will be spent. Because half was spent when income was $2000 now with income increased less then half would be spent.

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