Question

The income elasticity of demand for eggs has been estimated to be 0.57. If income grows by 5% in a period, all other things unchanged, demand will:

a. decrease by more than 5.7%.
b. decrease by less than 5.7%.
c. increase by about 2.9.
d. increase by more than 5.7%.

Answer 1

With an income elasticity of demand for eggs at 0.57, a 5% increase in income will lead to approximately a 2.9% increase in demand for eggs. This relationship shows that eggs are a normal good, meaning demand increases as income rises.

Step-by-step explanation:

The income elasticity of demand measures how the quantity demanded of a good changes in response to a change in consumers' income. When it comes to normal goods, which are those goods that see an increase in demand as income rises, this elasticity is positive. Given the income elasticity for eggs at 0.57, we can calculate the expected percentage change in demand resulting from a 5% increase in income by multiplying the income elasticity of demand by the percentage change in income. The formula is:

Percentage Change in Demand = Income Elasticity of Demand × Percentage Change in Income

In this case:

Percentage Change in Demand = 0.57 × 5%

This gives us a 2.85% (approximately 2.9%) increase in demand for eggs. Therefore, the correct answer to the student's question is 'c. increase by about 2.9'.