Question

Suppose that both wheat and corn have an income elasticity of 0.1.

a. if the average income in the economy increases by 2 percent each year, by what percentage does the quantity demanded of wheat increase each year, holding all other factors constant?

Answer 1

The demand for wheat would increase by 0.2 percent. Income elasticity indicates how much demand for something increases or decreases when income goes up or down. It is the calculated as the ratio of the percentage change in quantity demanded to the percentage change in income.