Question

The quantity demanded of good Z rises from 230 units to 250 units as income increases from $50,000 to $55,000. The income elasticity of demand for good Z is _____________ and good Z is a(n) ___________ good.

Answer 1

0.87; Normal good

Step-by-step explanation:

Given that,

Initial quantity demanded = 230

New quantity demanded = 250

Initial income = $50,000

New income = $55,000

Percentage change in the quantity demanded:

= (Change in the quantity demanded ÷ Initial quantity demanded) × 100

= [((250 - 230) ÷ 230) × 100

= (20 ÷ 230) × 100

= 8.7%

Percentage change in the income:

= (Change in the income ÷ Initial income) × 100

= [(($55,000 - $50,000) ÷ $50,000) × 100

= ($5,000 ÷ $50,000) × 100

= 10%

Therefore, the income elasticity of demand is as follows:

= Percentage change in the quantity demanded ÷ Percentage change in the income

= 8.7 ÷ 10

= 0.87

Therefore, the income elasticity of demand for Good Z is comes out to be positive which indicates that the good Z is a normal good. This means that there is a positive relationship between the income of the consumer and the quantity demanded for the good.