The purchasers of product B have an income elasticity of demand of 1.2. If their income increases by 10%, then by how much should Mickey's sales from product B increase? (in %, not dollars or units, and be sure to put the % sign)
In economics, income elasticity of demand measures the responsiveness of the demand for a good to a change in the income of the people demanding the good, ceteris paribus. It is calculated as the ratio of the percentage change in demand to the percentage change in income. For example, if, in response to a 10% increase in income, the demand for a good increased by 20%, the income elasticity of demand would be 20%/10% = 2. So, in our example if their income increases by 10%, then Mickey's sales from product B will increase by 10%*1.2 = 12%.