Final answer:
To calculate the income elasticity of demand for pizza as income increases from $20,000 to $24,000, we need information about changes in quantity demanded, in addition to the constant price. Without this, we cannot find the elasticity. Price elasticity of demand is used to adjust pricing strategies, with values above 1 indicating a decrease in price could increase revenue due to the elastic nature of demand, and values below 1 suggesting an increase might be beneficial as demand is inelastic.
Step-by-step explanation:
When determining the income elasticity of demand for a product such as pizza, we measure how the demand changes as a customer's income changes. In this case, the price of pizza remains constant, either at $10 or $14, while the income increases from $20,000 to $24,000. However, to calculate the income elasticity of demand, we would also need information about how the quantity demanded changes with the increase in income. Without such information, we cannot calculate the income elasticity of demand.
Let's look at the situation provided in your references. If the elasticity of demand for a new drug is 1.4, I would advise the company to lower the price since the demand is elastic (greater than 1), meaning a decrease in price would result in a greater percentage increase in quantity demanded, thereby increasing revenue. If the elasticity were 0.6 (inelastic), I would recommend raising the price because the percentage drop in quantity demanded would be less than the percentage increase in price, leading to increased revenue. Finally, if the elasticity were exactly 1, I would advise the company to keep the price the same, as total revenue is maximized when the price elasticity of demand is unitary.
Regarding good classifications, if the average annual income rose and the quantity of bread consumed fell, this would indicate that bread is an inferior good. The calculated income elasticity would show a negative value, reflecting the inverse relationship between income and demand for inferior goods.