Question

If the country enters a period of prosperity, resulting in consumer income increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result?a. Demand will increase by 1.2%b. Demand will increase by 3.2%c. Demand will increase by 4.8%

Answer 1

Answer: Option (b) is correct.

Explanation:

Given that,

Income elasticity of a good = 0.8

Percentage increase in consumer income = 4%

Therefore,

Income elasticity of demand = $\frac{Percentage\ change\ in\ Quantity\ demanded}{Percentage\ change\ in\ income}$

                                         0.8 = $\frac{Percentage\ change\ in\ Quantity\ demanded}{4}$

Percentage change in Quantity demanded = 0.8 × 4

                                                                        = 3.2%

Hence, Quantity demanded increases by 3.2%.