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Chapter 5: Q. 21 (page 130)

What is the formula for the income elasticity of demand?

Short Answer

Expert verified

The formula for the income elasticity of demand isE=%∆Q%∆I.

Step by step solution

01

Step 1. Income elasticity of demand

The income elasticity of demand measures how much the quantity demanded changes in response to changes in income. It refers to the ratio of change in quantity demanded to change in income, both of which are expressed in percentages.

02

Step 2. Formula

As described below, the percentage change in quantity needed is divided by the percentage change in revenue.

incomeelasticityofdemand=%changeinquantitydemanded%changeinincome

or

E=%∆Q%∆I

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Most popular questions from this chapter

Would you expect supply to play a more significant

role in determining the price of a basic necessity like

food or a luxury like perfume? Explain. Hint: Think

about how the price elasticity of demand will differ

between necessities and luxuries.

Transatlantic air travel in business class has an

estimated elasticity of demand of 0.62, while

transatlantic air travel in economy class has an estimated

price elasticity of 0.12. Why do you think this is the

case?

If supply is inelastic, will shifts in demand have a larger effect on equilibrium price or on quantity?

What is the formula for the wage elasticity of labor supply?

A city has built a bridge over a river and it decides

to charge a toll to everyone who crosses. For one year,

the city charges a variety of different tolls and records

information on how many drivers cross the bridge. The

city thus gathers information about elasticity of demand.

If the city wishes to raise as much revenue as possible

from the tolls, where will the city decide to charge a toll:

in the inelastic portion of the demand curve, the elastic

portion of the demand curve, or the unit elastic portion?

Explain.
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