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 ? Oct 17, 2016

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.

${Y}_{e} = \frac{{q}_{1} - {q}_{2}}{\frac{{q}_{1} + {q}_{2}}{2}} \div \frac{{I}_{1} - {I}_{2}}{\frac{{I}_{1} + {I}_{2}}{2}}$

${Y}_{e} = \frac{1000 - 2000}{\frac{1000 + 2000}{2}} \div \frac{15000 - 20000}{\frac{15000 + 20000}{2}}$

${Y}_{e} = \frac{- 1000}{\frac{3000}{2}} \div \frac{15000 - 20000}{\frac{35000}{2}}$

${Y}_{e} = \frac{- 1000}{1500} \div \frac{- 5000}{17500}$

${Y}_{e} = \frac{- 1000}{1500} \times \frac{175000}{- 5000} = 2.33$

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.]