Question

Suppose that Jayce's income as a student is $20,000 per year and that the job offer he receives comes with a salary of $31,000. In the questions below, give all answers to two decimals.

If his consumption of ramen noodles falls from 400 packs per year to 30 packs per year, his income elasticity of ramen noodles is what?  and they are a(n)  

inferior to Jayce.

If his consumption of hot dogs increases from 200 per year to 230 per year, his income elasticity of hot dogs is what?

Answer 1

Income elasticity of demand for a good measure the responsiveness of quantity demanded to change in income

Use the midpoint method to calculate the income elasticity

According to the mid-point formula, income elasticity of demand for a product is given by:

e = (Q2 – Q1) / [(Q2 + Q1)/2] / (M2 – M1) / [(M2 + M1)/2]

1) Income is increasing from 20000 to 31000. Quantity of ramen noodles declines from 400 to 30

e = (30 - 400)/((400 + 30)/2) divided by (31000 - 20000)/((31000 + 20000)/2)

= -3.99

This gives income elasticity of -3.99.

Since it is negative ramen noodles are inferior

2) e = (230 - 200)/((200 + 230)/2) divided by (31000 - 20000)/((31000 + 20000)/2)

= 0.32

This gives income elasticity of 0.32