Question

Eric's income increased from $40,000 to $50,000 per year. Eric's consumption of tickets to pro football games increased from two to four per year. By the midpoint formula, his income elasticity of demand for pro football game tickets is equal to _____, and football game tickets are _____ goods.
a. –3; inferior
b. +3; normal
c. –0.33; inferior
d. +0.67; normal

Answer 1

Answer: b. +3; normal

Explanation:

Income elasticity measures the responsiveness of quantity demanded to a change in consumer's income.  When demand for a good increases with an increase in income, it is termed as a normal good. While, when demand for a good decreases with an increase in income it is termed as an inferior good.

Using the mid-point method,

$e_{i} = \frac{ 4 - 2}{\frac{4 + 2}{2} } * \frac{\frac{50000 + 40000}{2} }{50000 - 40000}$

$e_{i} = \frac{2}{3}  *  \frac{45,000}{10,000}$

$e_{i} =0.67*4.5$

$e_{i} = 3.015$

Therefore, income elasticity is 3 and the good is a normal good as rise in income increases demand.