Question

Between 2007 and 2009, when incomes dropped by 4, the quantity of hyundai sonata bought fell from 145,568 to 120,028. calculate the income elasticity of demand. is the hyundai sonata an inferior or normal good?

Answer 1

The income elasticity of demand for Hyundai Sonata is calculated to be 4.385, indicating that it is a normal good, as consumption increases with rising income.

Step-by-step explanation:

The question asks to calculate the income elasticity of demand for Hyundai Sonata based on the change in income and the corresponding change in quantity demanded between 2007 and 2009. To find the income elasticity of demand, we use the formula:

E = (% change in quantity demanded) / (% change in income)

First, we calculate the percentage change in quantity demanded:

% change in quantity demanded = ((New quantity - Initial quantity) / Initial quantity) * 100

= ((120,028 - 145,568) / 145,568) * 100

= (-25,540 / 145,568) * 100

= -17.54%

Next, we calculate the percentage change in income. Since we know the income dropped by 4 (assuming 4 represents a certain percentage), this is simply -4%.

Now we can find the income elasticity of demand:

E = (-17.54%) / (-4%)

= 4.385

Since the income elasticity is positive and greater than 1, the Hyundai Sonata is considered a normal good, meaning consumption of the good increases as income increases. Conversely, an inferior good would have a negative income elasticity, as consumption decreases when income increases.