Question

Franklin is a skilled mechanical engineer, the president of his labor union at BMW, and an aspiring chef by night. Collective bargaining talks seem to sour with executives and looks as if a pay cut will be implemented by the end of the year. Many employees will be affected, especially his salary of $120,000 a year reduced to $100,000 a year. This expectation of a pay cut has changed his consumption habits for wild caught salmon of 40 per week to 25 per week. Franklin now plans on purchasing more farm raised salmon in lieu of wild caught salmon increasing his consumption from 10 per week to 60 week. What is Franklin's income elasticity of demand for farm raised salmon? What is Franklin's income elasticity of demand for wild caught salmon?

Answer 1

percentage change in income= (1,00,000 - 1,20,000)/ 1,20,000 = -0.16= -16%

percentage change in quantity demanded of raised salmon= (60-10)10= 500%

percentage change in quantity demanded of caught salmon= (25-40)40= - 0.375= -37.5%

Franklin's income elasticity of demand for wild caught salmon=

percentage change in quantity demanded of caught salmon/ percentage change in income= -37.5/-16= 2.34

Franklin's income elasticity of demand for farm raised salmon=

percentage change in quantity demanded of raised salmon/percentage change in income= 500/-16= -31.25