Question

Consider the market for "rainbow sandals" . Suppose average household income increases from â$31 thousand to â$50 thousand per year. As aâ result, the demand for increases from 402 to 559. Using the midpointâ formula, what is the "income elasticity of demand" forâ?

Answer 1

0.695

Step-by-step explanation:

The computation of the income elasticity of demand using the mid-point formula is given below:

Income elasticity of demand is

= Percentage change in quantity demanded ÷ percentage change in income

where,

Percentage change in quantity demanded is

= (New - old) ÷ (New + old) ÷ 2

= (559 - 402) ÷ (559 + 402) ÷ 2

= 157 ÷ 481

= 0.326

And, the percentage change in income is

= (New - old) ÷ (New + old) ÷ 2

= ($50,000 - $31,000) ÷ ($50,000 + $31,000) ÷ 2

= $19,000 ÷ $40,500

= 0.469

Now the income elasticity of demand is

= 0.326 ÷ 0.469

= 0.695