Question

Calculate Income Elasticity of Demand Question Suppose that when the price of cream cheese rises by 10%, the quantity of bagels demanded at the current price of bagels falls by 3%. When income rises by 10%, the quantity of bagels demanded at the current price increases by 1%. Calculate the income elasticity of demand for bagels. Round your answer to the nearest tenth. Your answer may be a positive or negative number.

Answer 1

eY is positive +0.1 therefore bagels are a normal good.

Explanation:

Given data:

when, 10% rise in cheese price, 3% fall in bagels quantity observed

when, 10% rise in income, 1% fall in bagels quantity observed

from formula for cross price elasticity of demand, determine
`e_(AB)`

`e_(AB) = ((−3\%)/((10\%)) = −0.3.`

As, eAB is negative, bagels $ cream cheese are complements.

By formula for income elasticity of demand,

we find that
`eY= ((+1\%))/((10\%)) = +0.1.`

Since eYis positive, bagels are a normal good.