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The Income Elasticity Of Demand Assignment Paper
A survey taken by residents from the imaginary town of Draw City tells economists that the following changes result from a
13% rise in income: - A
15% increase in the quantity of tokens demanded - A
5% decrease in the quantity of hearts demanded - A
34% increase in the quantity of queens demanded Compute the income elasticity of demand for each good and use the dropdown menus to complete the first column in the fable on the income elasticities, classify each good as either a normal good or an inferior good. (Hint: Be careful to keep track of the direction of chang. The sign of the income elasticity of demand can be positive or negative, and the sign gives important information.) Which of the following three goods is most likely to be classified as a luxury good ? Queens Tokens Hearts The Income Elasticity Of Demand Assignment Paper
Answer:
Given that:
A survey taken by residents from the imaginary town of Draw City tells economists that the following changes result from a 13% rise in income:
=> A 15% increase in the quantity of tokens demanded.
=> A 5% decrease in the quantity of hearts demanded.
=> A 34% increase in the quantity of queens demanded.
We have to calculate the income elasticity of demand for each good.
The income elasticity of demand is an economic measure of how responsive the quantity demanded for a good or service is to a change in income. The Income Elasticity Of Demand Assignment Paper
The income elasticity of demand for each good is calculated as follows:
Income elasticity of demand=% change in the quantity demanded% change in the income
Here, the income has increased by 13%.
For tokens:
A 15% increase in the quantity of tokens demanded.
Income elasticity of demand for tokens=15%13%=1513≈1.15
The elasticity is positive so it is a normal good.
For hearts:
A 5% decrease in the quantity of hearts demanded.
Income elasticity of demand for hearts=−5%13%=−513=−0.38
The elasticity is negative so it is an inferior good.
For queens:
A 34% increase in the quantity of queens demanded.
Income elasticity of demand for queens=34%13%=3413≈2.62
The elasticity is positive so it is a normal good. The Income Elasticity Of Demand Assignment Paper
The elasticity is the degree of change or responsiveness of quantity demanded due to changes in price, income, and price of related goods.
Queens are most likely to be classified as luxury goods.
Luxury goods should have an income elasticity greater than 1. Here income elasticity of queens is 2.62 which is greater than 1. So the luxury good is a queen.
Final answer
The income elasticity of demand and classification of each good is as follows:
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Income Elasticity
of Demand
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Normal Good or
Inferior Good
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The luxury good is a queen. The Income Elasticity Of Demand Assignment Paper
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