Question

Researchers have found that during the last recession, when income fell by 6 percent, many fast-food restaurants saw their sales increase by 8 percent while the sales of soda fell by 12 percent in grocery stores. what is the income elasticity of these groups of goods?

Answer 1

Income elasticity is obtained by dividing the percentage change in the quantity demanded of a product with by the percentage change in income.

When income fell by 6 per cent and sales of many fast food restaurants increase by 8 per cent, then the income elasticity for fast food would be:

8/-6 = -1.33

When income fell by 6 percent and sales of soda decreased by 12 percent, then the income elasticity for soda would be

-12/-6=2