Question

Suppose the income elasticity of demand of watches is 0.7. If the median income in the United States rises by 10%, then the demand for watches should:1. increase by 0.7%.2. decrease by 7%.3. increase by 7%.4. increase by 70%.

Answer 1

The income elasticity of demand measures the responsiveness of the quantity demanded of a good to changes in income. In this case, if the median income in the United States rises by 10%, the demand for watches should increase by 7%.

Step-by-step explanation:

The income elasticity of demand measures the responsiveness of the quantity demanded of a good to changes in income.

In this case, the income elasticity of demand for watches is 0.7, which means that an increase in income will increase the demand for watches, but at a slower rate.

If the median income in the United States rises by 10%, the demand for watches should increase by 7%.

This can be calculated by multiplying the income elasticity of demand (0.7) by the percentage change in income (10%).

Therefore, the correct answer is 3. increase by 7%.