Question

Sylvia's annual salary increases from $100,000 to $109,500, and she decides to increase the number of vacations she takes per year from three to four.

Calculate her income elasticity of demand for vacations.

Answer 1

Income elasticity of demand = 3.150

Step-by-step explanation:

given data

annual salary increases = $100,000 to $109,500

increase number of vacations = 3 to 4

solution

we get here income elasticity of demand for vacations by mid point method that is

income elasticity of demand for vacations = (change in the number of vacations ÷ average vacations) ÷ (change in annual salary ÷ average annual salary) .......................1

here

change in vacations is = 4 - 3

change in vacations = 1

and

average vacations will be =
`(4+3)/(2)`

average vacations = 3.5

so

here change in annual salary will be

change in annual salary = 109,500 - 100,000

change in annual salary = 9,500

and

average annual salary will be

average annual salary =
`(109500 + 100,000)/(2)`

average annual salary = 104750

so

now put all value in equation 1 we get

Income elasticity of demand =
`((1)/(3.5))/((9500)/(104750))`

Income elasticity of demand = 3.150