Question

Lauren\'s salary decreases from $37,000 to $30,000. she decides to reduce the number of outfits she purchases each year from 20 to 19. calculate her income elasticity of demand for new outfits.

Answer 1

Income elasticity of demand= 1/7000*100%=0.01

Answer 2

Answer:

Her income elasticity of demand for new outfits is 0.266.

Explanation:

The elasticity of demand is the percentage of change in the demand divided by the percentage change in income.

Percentage change in demand

The demand changes from 20 to 19. 19/20 = 0.95, so 19 is 95% of 20. There is a 1-0.95 = 0.05 = 5% change in demand.

Percentage change in income

Lauren's income decreases from 37000 to 30000. 30/37 = 0.811. There is a 1-0.811 = 0.189 = 18.9% change in demand.

So her income elasticity of demand for new outfits is:

$IE = \frac{0.05}{0.189} = 0.2646$

Her income elasticity of demand for new outfits is 0.266.