Question

Blake eats two bags of potato chips each day. Blake's hourly wage increases from $8 to $15, and he decides to stop eating generic chips and instead eats a name brand potato chip. Use the midpoint method to calculate Blake's income elasticity of demand for generic potato chips Round your answer to 2 decimal places.The good isa. a normal good and income-elasticb. a normal good and income-inelasticc. an inferior good

Answer 1

Price elasticity= 2.875

The good is an inferior good

Step-by-step explanation:

Elasticity of demand is defined as the sensitivity of quantity demanded to changes in price of a particular commodity.

Midpoint method is used to determine elasticity between two prices. Change in quantity and price are divided by the average of each.

Price elasticity= {Q1 ÷ (Q2 + Q1)/2} ÷ {P1 ÷ (P1 + P2)/2}

Average quantity = (2 + 0) ÷ 2= 1

Average price= (8 + 15) ÷ 2 = $11.5

Price elasticity= (2 ÷ 1) ÷ (8 ÷ 11.5)

Price elasticity= 2 ÷ 0.6957 = 2.875

The good is an inferior good

An inferior good is one that demand falls as income of the buyer increases.

In this case an increase in income from $8 to $15 resulted in a fall in demand from 2 to 0

Answer 2

The correct answer is option (c) good is an inferior good.

Step-by-step explanation:

Solution

Given that:

Blake's hourly wage increases form = $8 to $15

Now,

By using the midpoint method we compute Blake's income elasticity of demand for generic potato chips which is given below:

Income elasticity of demand =(Y₁ +Y₂)/(Q₁+Q₂) * (Q₂-Q₁)/ (Y₁ - Y₂)

Thus,

Y₁ =8

Y₂ = 15

Q₁ = 2

Q₂ = 0

So,

Income Ed =23/2x - 2/7

= -46/14

=- 3.28

Therefore, the increase in income decreases demand of generic potato chips. this shows negative income effect which implies that good is inferior in nature.