Question

John's income rises from $20000 to $22000 and the quantity of hamburger he buys each week falls from 2 pounds to 1 pound. the income elasticity would be :

a. 2
b. 1
c. -7
d. -5

Answer 1

The income elasticity of demand for John's hamburger consumption is calculated to be -7, indicating that hamburgers are an inferior good. The correct answer is option c. -7.

Step-by-step explanation:

The question relates to the calculation of income elasticity of demand, which measures how the quantity demanded of a good is affected by a change in income. In this scenario, John's income increases from $20,000 to $22,000, and his hamburger consumption decreases from 2 pounds to 1 pound per week. The income elasticity of demand formula is percentage change in quantity demanded divided by percentage change in income. The calculation is as follows:

Percentage change in income = (New Income - Old Income) / ((New Income + Old Income) / 2) = ($22,000 - $20,000) / (($22,000 + $20,000) / 2) = $2,000 / $21,000 ≈ 0.0952, or 9.52%.

Percentage change in quantity demanded = (New Quantity - Old Quantity) / ((New Quantity + Old Quantity) / 2) = (1 - 2) / ((1 + 2) / 2) = -1 / 1.5 ≈ -0.6667, or -66.67%.

Income Elasticity of Demand = Percentage change in quantity demanded / Percentage change in income ≈ -66.67% / 9.52% ≈ -7.

Therefore, the income elasticity of demand for hamburgers in this case is -7, indicating that hamburgers are an inferior good for John, as consumption decreases when his income increases. The correct option is c. -7.