Question

If the income elasticity of demand for rice is -0.21, what effect will a four percent increase in income have on rice consumption? What can we infer about rice as a result of this elasticity calculation?

Answer 1

As per the question income elasticity of demand (Ei) = -0.21

Percentage change in income (increase in income) = 4%

Percentage change in Quantity = ?

Income elasticity of demand (Ei) = Percentage change in Quantity / Percentage change in income

-0.21 = Percentage change in Quantity / 4%

Percentage change in Quantity = - 0.21 x 4% = -0.0084 = -0.84%(Decrease in consumption of rice)

With an 4% increase in income leads to 0.84% decrease in the consumption of rice

Inference: -   With an 4% increase in income leads to 0.84% decrease in the consumption of rice, which indicates that rice is an inferior goods. Because in case of inferior goods with an increase in income of the consumer, the quantity demanded for inferior goods decreases and vice-versa. Moreover in case of inferior goods the income elasticity of demand is negative. In this problem the income elasticity of demand is -0.21 which is a negative value.