Homework Answers
According to the mid-point formula, the Income elasticity of demand for a product is given by:
em = (Q2 – Q1) / [(Q2 + Q1)/2] / (M2 – M1) / [(M2 + M1)/2]
a) For good X, we have
em = (8 - 4)/((8 + 4)/2) / (60000 - 40000)/((60000 + 40000)/2)
= 1.67
b) For good Y, we have
em = (15 - 25)/((15 + 25)/2) / (60000 - 40000)/((60000 + 40000)/2)
= -1.25
c) Income elasticity of demand is negative for good Y. Hence good Y is inferior in nature. As income rises, consumer buys less units of good Y
Income elasticity of demand is positive for good X. Hence good X is normal in nature. As income rises, consumer buys more units of good X
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PLEASE READ CAREFULLY & WRITING MUST BE CLEAR TO READ!!
THANKS!!
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