Activities for Income Elasticity

Activities

  • Activity 1

    A 10% increase in income causes a 20% increase in the quantity demanded for craft beer. It can be concluded that _____

    Think again. It is the income elasticity that is greater than one and not the price elasticity. The income elasticity of craft beer can be calculated as follows: $$e_y = {\text{% change in quantity demanded} \over \text{% change in income}}$$ $$\text{ } = {20 \over 10}$$ $$\text{ } = {2}$$

    Think again. An increase in income leads to an increase in the demand for craft bear making it positive.

    Think again. In the case of a necessity the income elasticity is greater than zero but smaller than one. In the case of craft beer the income elasticity is: $$e_y = {\text{% change in quantity demanded} \over \text{% change in income}}$$ $$\text{ } = {20 \over 10}$$ $$\text{ } = {2}$$

    Correct. An increase in income leads to an increase in the demand for craft beer. This is "normal behaviour" and craft beer is thus classified as a normal product. The income elasticity of a normal product is positive and this is also borne out (proven) by the statement – an increase in income (a positive change) leads to an increase in quantity demanded (a positive change). The income elasticity of craft beer can be calculated as follows: $$e_y = {\text{% change in quantity demanded} \over \text{% change in income}}$$ $$\text{ } = {20 \over 10}$$ $$\text{ } = {2}$$

    An increase in income tends to cause a decrease in the demand for margarine. It can be concluded that the _____

    Think again. This question deals with income elasticity and not price elasticity.

    Think again. This question deals with income elasticity and not price elasticity.

    Correct. The relationship between the two variables income and demand is negative: an increase in income (a positive change) leads to a decrease in demand (a negative change), and we know that a positive divided by a negative gives us a negative answer.

    Think again. The relationship between the two variables income and demand is negative.

  • Activity 2

    a. Write down the formula for income elasticity.
    b. Select the appropriate characteristics for an inferior good from the following categories:

    Categories
    Demand decreases when income increases. Income elasticity is positive. ey < 0
    Demand increases when income increases, but not as rapidly as income. Income elasticity is negative. 0 < ey < 1
    Demand increases when income increases, but more rapidly than income. ey > 1

    c. Select the appropriate characteristics for a luxury good from the following categories:

    Categories
    Demand decreases when income increases. Income elasticity is positive. ey < 0
    Demand increases when income increases, but not as rapidly as income. Income elasticity is negative. 0 < ey < 1
    Demand increases when income increases, but more rapidly than income. ey > 1

    d. Select the appropriate characteristics for a necessity from the following categories:

    Categories
    Demand decreases when income increases. Income elasticity is positive. ey < 0
    Demand increases when income increases, but not as rapidly as income. Income elasticity is negative. 0 < ey < 1
    Demand increases when income increases, but more rapidly than income. ey > 1
    Click to Show Answer

    a. $$\text{Income elasticity of demand }e_y = {\text{% change in quantity demanded} \over \text{% change in income}}$$
    b. Inferior good

    Categories
    Demand decreases when income increases. Income elasticity is negative. ey < 0

    c. Luxury good

    Categories
    Demand increases when income increases, but more rapidly than income. Income elasticity is positive. ey > 1

    d. Necessity

    Categories
    Demand increases when income increases, but not as rapidly as income. Income elasticity is positive. 0 < ey < 1