Answer to Question #113212 in Microeconomics for syed ali

Question

b)Mr.Ali has an income of Rs.30,000 and he purchases 100 units of X-GOOD. His income decreases by 20% and now he can purchase 90 units of X-GOOD.Calculate Calculate elasticity and also mention the type of elasticity.

Answer 1

The income elasticity of demand is computed as:

$$E_Y = \dfrac{\%\Delta Q}{\%\Delta Y}$$

The percentage change in demand is:

$$\%\Delta Q = \dfrac{90 - 100}{100} \times 100 = -10\%$$

If the income decreases by 20%, the income elasticity of demand is equal to:

$$E_Y = \dfrac{-10\%}{-20\%}$$

$$\boxed{\color{red}{E_Y = 0.5}}$$