Question

1. 1.Suppose we know that the income elasticity of demand for beer in cans in –0.3. If consumers’ incomes go up by 20%, what would be the change in the demand for beer? (Provide the formula and your calculations.)

Answer 1

Income elasticity of demand measures the change in demand for a particular good when the income of a consumer changes (Increases/decrease).

It is given by the formula,

Income elasticity of demand = %Change in demand / %Change in income

In the above question it is given that, income elasticity of demand for beer in cans is -0.3 while the consumers income increases by 20%. Then the change in demand can be determined by using the above equation as,

-0.3 = %Change in demand / 20%

Change in demand = -0.3 * 20

= -6//

Hence the demand decreases by 6% when the income Increases by 20%.