1) How to compute income elasticity of demand using midpoint formula ? 2) Is it an inferior or a normal good ? 3) If normal good, is it a necessity or a use of luxury ?
1 Answer
Oct 17, 2016
Income Elasticity for the said good is
It is positive, hence the good is Normal.
Elasticity value is greater than one, hence the good is luxury.
Explanation:
Income Elasticity of Demand = Percentage change in demand / percentage change in income.
#Y_e=(q_1-q_2)/((q_1+q_2)/2) -:(I_1-I_2)/((I_1+I_2)/2)#
#Y_e=(1000-2000)/((1000+2000)/2) -:(15000-20000)/((15000+20000)/2)#
#Y_e=(-1000)/(3000/2) -:(15000-20000)/((35000)/2)#
#Y_e=(-1000)/1500-:(-5000)/17500#
#Y_e=(-1000)/1500xx(175000)/(-5000)=2.33#
Income Elasticity for the said good is
It is positive, hence the good is Normal.
Elasticity value is greater than one, hence the good is luxury.
[If Value is greater than 0 and less than one, the good is necessary.]
