Question

A local kayak outfitter has been looking over the latest data from the Census, which reported that income in the area where the outfitter is based has increased by 20%. If the outfitter then tells you that her sales increased by 10%, what would be the income elasticity of demand and how would you interpret it

Answer 1

a)

Income elasticity of demand = 0.5.

b)

it implies that a change in income by a given percentage would produce a 50% change in the quantity of demand.

Step-by-step explanation:

The income elasticity of demand measures the degree of responsiveness of demand for a product to a change in the consumer income.

If a change in consumer income by a given percentage produces a less than a proportionate change in quantity demand , the income elasticity of demand is inelastic . It is elastic if the reverse is the case

Income elasticity of demand =

=% change in demand/ % change in income

=10%/20%

= 0.5.

it implies that a change in income by a given percentage would produce a 50% change in the quantity of demand. For example, if income decreases by 100%, the quantity demand will decrease by just 50%

Answer 2

The income elasticity of demand is 0.5

The Outfitter's products are a normal good and a necessity as the YED is positive and between 0 and 1 respectively.

Step-by-step explanation:

Income elasticity of demand (YED) measures the responsiveness of demand for a product to changes in income of the people. It traces how changes in income bring about a change in demand for a product. The formula for YED is,

YED = % Change in Quantity demanded / %Change in Income

YED = 10% / 20% = 0.5

The income elasticity of demand for the outfitter is a positive 0.5 which represents that the outfitters products are a normal good as the YED is positive and an increase in income bring about an increase in demand.

Moreover, am income elasticity of demand between 0 and 1 represents goods which are considered to be a necessity and the demand for these goods rises at a lower percentage than the change in income. As, the YED for the outfitter is 0.5, it is a necessity.