Question

Mr. Raees Ahmad bought 50 litres of petrol when his monthly income was Rs. 25,000. Now his monthly income has risen to Rs. 50,000 and he purchases 100 litres of petrol. His income elasticity of demand for petrol is: a.1 b. 100% c. Less than one d. More than one.

Answer 1

Step-by-step explanation:

Given, Raees' initial income = Rs. 25000 = F2

Final income = Rs. 50000 = F1

Change in income = F1-F2 = 50000-25000 = Rs. 25000

Average income = (F1+F2)/2 (50000+25000)/2 = 75000/2 = Rs 37500

We know,

% Change in income = Change in income/Average income

Putting in the values:

• % Change = (25000/37500)*100
• 25000/375 *
• 200/3
• 66.67%( To the nearest tenth)

Hence % change in income = 66.67% = C2

Also Given,

• Initial demand = 50 L = D2
• Final demand = 100 L = D1

Change in demand = D1-D2 = 100-50 = 50L

Average demand = (D1+D2)/2 = (50+100)/2 = 150/2 = 75 L

% Change in demand = (Change in demand/Average demand)*100

Putting in the values,

• % Change = 50/75 *100 = 200/3 = 66.67% = C1

Hence, % change in demand = 66.67%

We know,income elasticity of demand = (% Change in Demand/% change in income) *100

• Income elasticity = C1/C2 *100

Putting in the values,

• Income elasticity = 66.67/66.67 *100 = 1*100 = 100%

Hence, income elasticity in demand = 100%

Answer:

100%