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 ?

enter image source here

1 Answer
Oct 17, 2016

Answer:

Income Elasticity for the said good is #=2.33#

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 #=2.33#

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.]