Question

Suppose that as my income allocated to sweets increases from $100 to $250, my consumption of ice cream falls from 20 ice cream cones to 5 ice cream cones.
a. What is my income elasticity of demand for ice cream cones at the price of $250?
b. Are ice cream cones inferior goods, necessities, or luxuries?

Answer 1

Answer
Income elasticity of demand=(change in quantity/average quantity)/(change in income/average income)
Change in quantity=5-20=-15
average quantity=(20+5)/2=22.5
Change in income=250-100=150
average income=(250+100)/2=175
Income elasticity of demand=(-15/22.5)/(150/175)
=-0.78
income elasticity of demand is -0.78
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b)
inferior good
Income elasticity of demand is negative means the income effect on demand is negative, so the good is inferior good.
Positive income elasticity means normal good
income elasticity between 0 and 1 means the good is the necessity and income elasticity above 1 means the good is luxurious