Question

If a 4 percent decrease in income results in an 8 percent increase in the demand for boxed macaroni and cheese the income elasticity for demand for macaroni and cheese is

Answer 1

Income elasticity of demand measures how much change comes in quantity demanded due to change in the income of the individual.

Income Elasticity of demand = % change in quantity demanded / % change in income

Given, % change in income= -4%, , % change in demand = +8%

= 8/4 = 2

Income elasticity of demand for macaroni and cheese is 2, that means our demand is elastic and 1% change in income, creates 2% change in demand for the good. Here, we can also see that there exist a negative relationship between income and demand for macaroni and cheese, as a decrease in income leads to an increase in demand for the good. So, from this, we can also conclude that our good is an inferior good as there is a negative elasticity between good and income.