### Understanding Demand Shifts and Income Elasticity#### Explanation of the Demand Curve ShiftOn the graph, demand initially starts at the curve labeled D-Start. The graph illustrates the effect of an increase in consumer income on the demand for a certain good.- **Demand Curve Shifts Due to Income Change**: - When income increases by 50%, the demand curve shifts to the right, from D-Start to D₁. - The new demand curve, D₁, indicates a higher quantity demanded at each price level compared to the original demand curve, D-Start. - Conversely, if the demand curve were to shift to D₂ (illustrated in red), it would indicate a decrease in demand, potentially due to a decrease in income or other factors.#### Detailed Graph Explanation- **Axes**: - The vertical axis (Price) measures the price of the good. - The horizontal axis (Quantity) measures the quantity demanded of the good.- **Price Point**: - The price of $10 is highlighted on the vertical axis.- **Intersection Points and Quantities**: - At D-Start, the quantity demanded at $10 is approximately 100 units. - At D₁, the quantity demanded at $10 increases to approximately 125 units.#### Income Elasticity CalculationFrom D-Start to D₁, the income elasticity of demand can be calculated using the endpoint method. Income elasticity of demand measures the responsiveness of the quantity demanded to a change in income. To calculate the income elasticity, use the formula:\[ E_I = \frac{\frac{Q_2 - Q_1}{Q_1}}{\frac{I_2 - I_1}{I_1}} \]Where:- $ Q_1 $ and $ Q_2 $ are the initial and new quantities demanded.- $ I_1 $ and $ I_2 $ are the initial and new income levels.By applying this formula, you can determine how sensitive the demand for the good is to changes in consumer income.It is important to understand these shifts and calculations, as they are crucial in economic analysis, helping businesses and policymakers make informed decisions.

End Point Method: It is a first-approximation, method of calculating elasticity, especially income…

On the graph, demand starts at D-Start. Suppose income increases by 50% and the demand curve shifts to D1. Price $10 D: D-Start D2 80 100 125 Quantity From D-Start to D1, the income elasticity using the endpoint method is:

On the graph, demand starts at D-Start. Suppose income increases by 50% and the demand curve shifts to D1. Price $10 D: D-Start D2 80 100 125 Quantity From D-Start to D1, the income elasticity using the endpoint method is:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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