Question

After 30 years working for a company, Sally finally gets promoted and her salary has increased from $1000 per week to $1500 per week. What is Sally’s elasticity of demand for goods below? State, if it is a normal or inferior good.

a) Peaches: Quantity demanded before raise=4 per week, after raise=9 per week

b) Orange juice: Quantity demanded before raise= 0.75 gallons per week, Quantity after raise= 1 gallon per week.

c) Shellfish: Quantity demanded before increase= 2 per week, after increase= 4 per week

Answer 1

Formula for Income elasticity of demand = % age change in quantity demand / % age change in income

e = (change in Q/initial Q)/(change in income/initial income)

If e is greater than 0 than its a normal good otherwise its inferior good.

For Peaches

e= ((9-4)/4)/((1500-1000)/1000))

e= 2.5

Hence its a normal good

For Orange juice

e= ((1-0.75)/0.75)/((1500-1000)/1000)

e=0.66

Hence its a normal good

For shell fish

e = ((4-2)/2)/((1500-1000)/1000)

e=2

Hence its a normal good