Question

When Logan earned $1,000 per week, he purchased 5 karate lessons and 40 gallons of gasoline. When his earnings increased to $1,100 per week, he purchased 6 karate lessons and 43 gallons of gasoline. The income elasticity of karate lessons and gasoline are _____ and _____, respectively.

Answer 1

a). Income elasticity of Karate lessons=2

b). Income elasticity of gasoline=0.75

Step-by-step explanation:

The income elasticity can be defined as a way of determining how the quantity of demand for a given product changes with respect to a change in income.

The income elasticity can be calculated using the formula below;

Income elasticity=percentage change in quantity demanded/percentage change in income

where;

Percentage change in quantity demanded=(Final quantity demanded-Initial quantity demanded)/Initial quantity demanded×100

Percentage change in income=(Final income-Initial income)/Initial income×100

a). Income elasticity of karate lessons

Final quantity demanded=6 karate lessons

Initial quantity demanded=5 karate lessons

Percentage change in quantity demanded=(6-5)/5×100=20%

Final income=$1,100

Initial income=$1,000

Percentage change in income=(1,100-1,000)/1,000×100=10%

Income elasticity=20%/10%=2

Income elasticity of Karate lessons=2

b). Income elasticity of gasoline

Final quantity demanded=43 gallons

Initial quantity demanded=40 gallons

Percentage change in quantity demanded=(43-40)/40×100=7.5%

Final income=$1,100

Initial income=$1,000

Percentage change in income=(1,100-1,000)/1,000×100=10%

Income elasticity=7.5%/10%=0.75

Income elasticity of gasoline=0.75