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16 November, 07:49

A local kayak outfitter has been looking over the latest data from the Census, which reported that income in the area where the outfitter is based has increased by 20%. If the outfitter then tells you that her sales increased by 10%, what would be the income elasticity of demand and how would you interpret it

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  1. 16 November, 08:01
    0
    The income elasticity of demand is 0.5

    The Outfitter's products are a normal good and a necessity as the YED is positive and between 0 and 1 respectively.

    Explanation:

    Income elasticity of demand (YED) measures the responsiveness of demand for a product to changes in income of the people. It traces how changes in income bring about a change in demand for a product. The formula for YED is,

    YED = % Change in Quantity demanded / %Change in Income

    YED = 10% / 20% = 0.5

    The income elasticity of demand for the outfitter is a positive 0.5 which represents that the outfitters products are a normal good as the YED is positive and an increase in income bring about an increase in demand.

    Moreover, am income elasticity of demand between 0 and 1 represents goods which are considered to be a necessity and the demand for these goods rises at a lower percentage than the change in income. As, the YED for the outfitter is 0.5, it is a necessity.
  2. 16 November, 08:08
    0
    a)

    Income elasticity of demand = 0.5.

    b)

    it implies that a change in income by a given percentage would produce a 50% change in the quantity of demand.

    Explanation:

    The income elasticity of demand measures the degree of responsiveness of demand for a product to a change in the consumer income.

    If a change in consumer income by a given percentage produces a less than a proportionate change in quantity demand, the income elasticity of demand is inelastic. It is elastic if the reverse is the case

    Income elasticity of demand =

    =% change in demand / % change in income

    =10%/20%

    = 0.5.

    it implies that a change in income by a given percentage would produce a 50% change in the quantity of demand. For example, if income decreases by 100%, the quantity demand will decrease by just 50%
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