Question

If the income elasticity of demand (Em) for a good is .76, a 10% increase in income

Select one:

a. results in a .076% decrease in consumption of this good.

b. results in a 7.6% increase in consumption of this good.

c. results in a 76% increase in consumption of this good.

d. results in a .76% decrease in consumption of this good.

Answer 1

Income elasticity = 0.76

Increase in the income is given as 10% (0.10)

Answer - b. results in a 7.6% increase in the consumption of this good.

Income elasticity = % change in the Quantity Demanded / % change in the Income

0.76 = % change in the Quantity demanded / 0.10

0.076 = % change in the Quantity demanded

0.076 otherwise can be written as = 0.076*100 = 7.6%

Therefore there will be 7.6% increase in the consumption of this good.

As the income elasticity is less than one, it must be a normal good. However, it should be a necessity. For necessity the income elasticity will be greater than zero but less than one.