Answer to Question #93075 in Microeconomics for zanele

Question

A firm sold 2 000 product units per day in 2017. The average monthly household income in an economy increased by 25% in 2018. How many products did the company sell in 2018 if the income elasticity for the product was calculated at 0.4?

Answer 1

Sales in 2017 per day is 2 000 units, therefore sales per month (assuming 30 day period) is; (2000x30) = 60 000 units

Average monthly household income increased by 25% in 2018

Income elasticity of the product is 0.4

Income elasticity of a product is the responsiveness of the products demanded to a change in income. This is given summarized: 

Income Elasticity=(% Change in Quantity Demanded)/(% Change in Income)

Therefore;

% Change in Quantity Demanded=Income Elasticity x % Change in Income

= (0.4 x 25%) 

= 10

This means that the company increased its sales with 10% every month which is equivalent to 

10% of 60,000= 6000 units per month

Hence, units sold in 2018 = {% Change in quantity+Quantity sold in 2017}x12

   = (6000+60000) x 12

Sold units in 2018 = 792 000 units