Question

Lebron james purchases 5 steaks and 5 pounds of potatoes when his monthly compensation was $1500/month. When he gets a raise and receives $3500/month, he purchases 15 steaks and 3 pounds of potatoes. James' income elasticity for steaks is ___ and for potatoes is ____. An economist based on these results will classify steaks as ____ and potatoes as _____ goods

a) 0.8; -1.6; normal; inferior

b) 2.5; -0.62; elastic; inelastic

c) 2.5; -0.62; normal; inferior

d) 1.25; -0.62; normal; inferior goods

e) 0.8; -0.62; substitues; complementary goods

Answer 1

The income elasticity for steaks is 2.5 and for potatoes is -0.62. Steaks are classified as normal goods and potatoes are classified as inferior goods.

Step-by-step explanation:

The income elasticity of demand measures the responsiveness of quantity demanded to changes in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. To calculate the income elasticity for steaks, we can use the following formula:

Income Elasticity (Steaks) = [(Q2 - Q1) / (Q1)] / [(Y2 - Y1) / (Y1)]

Given that Lebron James purchased 5 steaks when his monthly compensation was $1500/month and 15 steaks when his monthly compensation was $3500/month, we can substitute these values into the formula to find:

Income Elasticity (Steaks) = [(15 - 5) / (5)] / [(3500 - 1500) / (1500)] = 2.5

Similarly, to calculate the income elasticity for potatoes, we can use the same formula:

Income Elasticity (Potatoes) = [(Q2 - Q1) / (Q1)] / [(Y2 - Y1) / (Y1)]

Given that Lebron James purchased 5 pounds of potatoes when his monthly compensation was $1500/month and 3 pounds of potatoes when his monthly compensation was $3500/month, we can substitute these values into the formula to find:

Income Elasticity (Potatoes) = [(3 - 5) / (5)] / [(3500 - 1500) / (1500)] = -0.62

Based on these results, the income elasticity for steaks is 2.5 and for potatoes is -0.62. An economist would classify steaks as normal goods and potatoes as inferior goods.