Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![### Income Elasticity of Demand Calculation
**Problem Statement:**
Calculate the income elasticity for the household when the income of a household rises by 10% and the demand for rice rises by 5%.
**Solution:**
Income elasticity of demand is a measure of how much the demand for a good changes with a change in consumer income. It is calculated using the formula:
\[ \text{Income Elasticity of Demand} = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Income}} \]
Given:
- Percentage change in income = 10%
- Percentage change in demand for rice = 5%
\[ \text{Income Elasticity of Demand} = \frac{5\%}{10\%} = 0.5 \]
**Interpretation:**
An income elasticity of 0.5 indicates that rice is a normal good for which demand increases as income increases, but at a proportionally smaller rate. This suggests rice is a necessity rather than a luxury good, as its demand does not rise as quickly as income does.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F88488e2c-0a47-4922-a6ba-876fd3432f18%2F524928c2-fa28-49bc-b5c5-2f9e658dded5%2Fxrlm59t_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Income Elasticity of Demand Calculation
**Problem Statement:**
Calculate the income elasticity for the household when the income of a household rises by 10% and the demand for rice rises by 5%.
**Solution:**
Income elasticity of demand is a measure of how much the demand for a good changes with a change in consumer income. It is calculated using the formula:
\[ \text{Income Elasticity of Demand} = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Income}} \]
Given:
- Percentage change in income = 10%
- Percentage change in demand for rice = 5%
\[ \text{Income Elasticity of Demand} = \frac{5\%}{10\%} = 0.5 \]
**Interpretation:**
An income elasticity of 0.5 indicates that rice is a normal good for which demand increases as income increases, but at a proportionally smaller rate. This suggests rice is a necessity rather than a luxury good, as its demand does not rise as quickly as income does.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 2 images
Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education