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Chapter 5: Q.21 (page 130)

What is the formula for the income elasticity of demand?

Short Answer

Expert verified

Income elasticity of demand is the ratio of % change in quantity demanded upon the % change in income.

Step by step solution

01

Step 1. Definition:

The percentage variation in quantity required divided by the percentage variation in income is the income elasticity of demand.

02

Step 2. Formula:

The elasticity of demand is also dependent on the level of income. The formula required to compute the income elasticity of demand is given below:

Incomeelasticityofdemand=%changeinquantitydemanded%changeinincome

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Most popular questions from this chapter

Suppose that business travellers and vacationers have the following demand for airline tickets from Chicago to Miami:

Price

Quantity Demanded (business travellers)

Quantity Demanded (vacationers)

\(150

2,100 tickets

1,000 tickets

200

2,000

800

250

1,900

600

300

1,800

400

  1. As the price of tickets rises from \)200 to $250, what is the price elasticity of demand for (i) business travellers and (ii) vacationers? (Use the midpoint method in your calculations.)
  2. Why might vacationers have a different elasticity from business travellers?

Assume that the supply of low-skilled workers is fairly elastic, but the employers’ demand for such workers is fairly inelastic. If the policy goal is to expand employment for low-skilled workers, is it better to focus on policy tools to shift the supply of unskilled labor or on tools to shift the demand for unskilled labor? What if the policy goal is to raise wages for this group? Explain your answers with supply and demand diagrams.

What is the relationship between price elasticity and position on the demand curve? For example, as you move up the demand curve to higher prices and lower quantities, what happens to the measured elasticity? How would you explain that?

The equation for a demand curve is P = 2/Q. What is the elasticity of demand as price falls from 5 to 4? What is the elasticity of demand as the price falls from 9 to 8? Would you expect these answers to be the same?

Why is the supply curve with constant unitary elasticity a straight line?
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