Question

. The income elasticity of demand for medical care is 1.35. This implies that: a. if income decreases by 1%, the quantity demanded for medical care decreases by 1.35%. b. if the price of medical care increases by 1%, the quantity demanded for medical care decreases by 1.35%. c. if the income of the average consumer increases by 1 dollar, the quantity demanded for medical care will increase by 1.35 units of care. d. if income increases by 1%, the quantity demanded for medical care decreases by 1.35%.

Answer 1

The correct answer is a).

Step-by-step explanation:

The income elasticity of demand refers to the percentual variation of quantity demanded of a certaing good in response to a percentual variation in income.

If the income elasticity of demand for medical care is 1.35,

a. if income decreases by 1%, the quantity demanded for medical care decreases by 1.35%. TRUE, this is what the definition implies.

b. if the price of medical care increases by 1%, the quantity demanded for medical care decreases by 1.35%. FALSE. In this elasticity, the sign is relevant. This income elasticity implies that changes in income and medical care expenses have the same sign.

c. if the income of the average consumer increases by 1 dollar, the quantity demanded for medical care will increase by 1.35 units of care. FALSE. The elasticity relates percentual variations, not absolute value variations.

d. if income increases by 1%, the quantity demanded for medical care decreases by 1.35%. FALSE. The same as point b.