Question

After Sally's income increased from $12,000 to $16,000 per year, her purchases of CDs increased from 40 to 60 per year. Using the midpoint method, one decimal place, and the negative sign if necessary, her income elasticity for CDs is _____.

Answer 1

To calculate: Income elasticity for CD using mid-point method

Solution:
Increase in income = $12000(I1) to $16000 (I2) = $4000
Increase in number of CD purchased = 40 (Q1) to 60 (Q2) = 20

Formula:
((Q2-Q1)/((Q1+Q2)/2))/((I2-I1)/((I1+I2)/2))

Where,
Q1 = initial quantity
Q2 = quantity after increase
I1 = initial income
I2 = income after increase

Putting values in the formula,

((60 - 40)/((40 + 60) /2))/((16000-12000)/((12000+16000)/2))

= 1.4

Answer = 1.4