Question

If the country enters a period of prosperity, resulting in consumer income increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result?a. Demand will increase by 1.2%b. Demand will increase by 3.2%c. Demand will increase by 4.8%

Answer 1

Answer: Option (b) is correct.

Step-by-step explanation:

Given that,

Income elasticity of a good = 0.8

Percentage increase in consumer income = 4%

Therefore,

Income elasticity of demand =
`(Percentage\ change\ in\ Quantity\ demanded)/(Percentage\ change\ in\ income)`

0.8 =
`(Percentage\ change\ in\ Quantity\ demanded)/(4)`

Percentage change in Quantity demanded = 0.8 × 4

= 3.2%

Hence, Quantity demanded increases by 3.2%.