Question

Calculate the income elasticity of demand for EACH of the following goods AND determine whether you are dealing with superior, normal, or inferior goods.

1. QD of Mac computers increased from 10 to 25 as income increased from $10,000/year to $20,000/year. Calculate the income elasticity of computers AND tell me what type of good computers are.
2. QD of motorcycles increased from 4 to 5 as income increased from $10,000/year to $20,000/year. Calculate the income elasticity of motorcycles AND tell me what type of good motorcycles are.
3. QD of bicycles decreased from 3 to 2 as income increased from $10,000/year to $20,000/year. Calculate the income elasticity of bicycles AND tell me what type of good bicycles are.

Answer 1

Calculating the income elasticity of demand for Mac computers results in 1.5 (superior good), for motorcycles it is 0.25 (normal good), and for bicycles, it is -0.33 (inferior good).

Step-by-step explanation:

To calculate the income elasticity of demand, you would use the formula:

Elasticity = (percent change in quantity demanded) / (Percent change in income)

For Mac computers: Change in QD = 25 - 10 = 15, Change in income = $20,000 - $10,000 = $10,000, Percentage change in QD = (15/10) * 100 = 150%, Percentage change in income = ($10,000/$10,000) * 100 = 100%, Elasticity = 150%/100% = 1.5.

Since the elasticity is greater than 1, Mac computers are a superior good. For motorcycles: Change in QD = 5 - 4 = 1, Percentage change in QD = (1/4) * 100 = 25%, Elasticity = 25%/100% = 0.25. As the elasticity is positive but less than 1, motorcycles are a normal good, but with a relatively low income elasticity.

For bicycles: Change in QD = 2 - 3 = -1, Percentage change in QD = (-1/3) * 100 = -33.33%, Elasticity = -33.33%/100% = -0.33. Since the elasticity is negative, bicycles are an inferior good.