Alex's income elasticity for bagels is 1.5, meaning a 1% income increase boosts his bagel demand by 1.5%. This classifies bagels as normal goods for Alex: higher income leads to proportionally higher bagel spending.
Income Elasticity of Demand for Bagels
To calculate Alex's income elasticity of demand for bagels, we need to follow these steps:
Calculate the percentage change in income: (New income - Old income) / Old income = ($5,000 - $3,000) / $3,000 = 66.67% increase.
Calculate the percentage change in quantity demanded for bagels: (New quantity - Old quantity) / Old quantity = (8 bagels - 4 bagels) / 4 bagels = 100% increase.
Divide the percentage change in quantity demanded by the percentage change in income: 100% increase / 66.67% increase = 1.5.
Therefore, Alex's income elasticity of demand for bagels is approximately 1.5. This means that for every 1% increase in his income, he increases his demand for bagels by 1.5%. Since the elasticity is greater than 1, bagels are considered a normal good for Alex. In other words, as his income rises, he spends a larger portion of his income on bagels.
It's important to note that this is just a one-time snapshot and doesn't necessarily reflect Alex's long-term income elasticity of demand for bagels. Other factors, such as changes in bagel prices or the availability of substitutes, could also influence his demand.