Question

When the Shaffers had a monthly income of $4,000, they usually ate out 8 times a month. Now that the couple makes $4,500 a month, they eat out 10 times a month. Compute the couple's income elasticity of demand for restaurant meals. Is a restaurant meal a normal or an inferior good to the couple?

Answer 1

Income Elasticity of Demand is 2

Step-by-step explanation:

Income Elasticity of demand measure the responsiveness of demand against the change in the income level.

Simple percentage method calculate the Income elasticity by taking ratio of percentage change in Demand to percentage change in Income of the product.

Percentage change in Demand = ( Revised demand - Initial demand ) / Initial demand

Percentage change in Demand = ( 10 times - 8 times ) / 8 times = -0.25 = 25%

Percentage change in Income = ( Revised income - Initial Income ) / Initial Income

Percentage change in Income = ( $4,500 - $4,000 ) / $4,000 = 0.125 = 12.5%

Income Elasticity = Percentage change in Demand / Percentage change in Income

Income Elasticity = 25% / 12.5% = 2