1) How to compute income elasticity of demand using midpoint formula ? 2) Is it an inferior or a normal good ? 3) If normal good, is it a necessity or a use of luxury ?

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1) How to compute income elasticity of demand using midpoint formula ? 2) Is it an inferior or a normal good ? 3) If normal good, is it a necessity or a use of luxury ?

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Answer 1 · 2016-10-17T04:39:40

Income Elasticity for the said good is $= 2.33$ $=2.33$

It is positive, hence the good is Normal.

Elasticity value is greater than one, hence the good is luxury.

Explanation:

Income Elasticity of Demand = Percentage change in demand / percentage change in income.

$Y_{e} = \frac{q_{1} - q_{2}}{\frac{q_{1} + q_{2}}{2}} \div \frac{I_{1} - I_{2}}{\frac{I_{1} + I_{2}}{2}}$ $Y_e=(q_1-q_2)/((q_1+q_2)/2) -:(I_1-I_2)/((I_1+I_2)/2)$

$Y_{e} = \frac{1000 - 2000}{\frac{1000 + 2000}{2}} \div \frac{15000 - 20000}{\frac{15000 + 20000}{2}}$ $Y_e=(1000-2000)/((1000+2000)/2) -:(15000-20000)/((15000+20000)/2)$

$Y_{e} = \frac{- 1000}{\frac{3000}{2}} \div \frac{15000 - 20000}{\frac{35000}{2}}$ $Y_e=(-1000)/(3000/2) -:(15000-20000)/((35000)/2)$

$Y_{e} = \frac{- 1000}{1500} \div \frac{- 5000}{17500}$ $Y_e=(-1000)/1500-:(-5000)/17500$

$Y_{e} = \frac{- 1000}{1500} \times \frac{175000}{- 5000} = 2.33$ $Y_e=(-1000)/1500xx(175000)/(-5000)=2.33$

Income Elasticity for the said good is $= 2.33$ $=2.33$

It is positive, hence the good is Normal.

Elasticity value is greater than one, hence the good is luxury.

[If Value is greater than 0 and less than one, the good is necessary.]

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1) How to compute income elasticity of demand using midpoint formula ? 2) Is it an inferior or a normal good ? 3) If normal good, is it a necessity or a use of luxury ?

1 Answer

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