Final answer:
To calculate income elasticity of demand, you need percentage changes in quantity demanded and income. For the given example of bread, with income rising and bread consumption falling, we find that bread has an income elasticity of approximately -0.51, meaning it's an inferior good.
Step-by-step explanation:
To calculate the income elasticity of demand, you need to know the percentage change in quantity demanded and the percentage change in income. In the student's pizza example, we lack specific data on income and quantity changes, so we cannot calculate the precise elasticity. However, the scenario describes pizza as a good with elastic demand, meaning that a price increase leads to a significant decline in quantity demanded. Let's explore another scenario to understand the concept better.
For the provided scenario about bread consumption with an average annual income rising from $25,000 to $38,000, and the quantity of bread consumed falling from 30 to 22 loaves, we can determine the income elasticity of demand for bread and classify it as a normal or inferior good using the formula:
Income Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Income)
First calculate the percentage changes:
% Change in Income = (($38,000 - $25,000) / $25,000) * 100 = 52%
% Change in Quantity Demanded = ((22 - 30) / 30) * 100 = -26.67%
Now, plug these values into the formula:
Income Elasticity of Demand for Bread = (-26.67%) / (52%) ≈ -0.51
Since the income elasticity of demand is negative, it indicates that bread is an inferior good, meaning people buy less of it as their income increases. If the elasticity of demand was positive, bread would be classified as a normal good.