Question

1.Data from the Bureau of Labor Statistics shows that U.S. income increased by 10% while consumer data shows that the quantity of Netflix subscriptions changed from 100 to 115 in the past year.

Compute the income elasticity for Netflix subscriptions.

2.From the previous problem, is a Netflix subscription a normal or an inferior good?

3.According to your answer in the previous problem, is demand for Netflix subscription income elastic or income inelastic?

4.Data from the Bureau of Labor Statistics shows that U.S. income increased by 10% while consumer data shows that the quantity demanded of organic lemonade drinks changed from 80 to 85.

Compute the income elasticity for organic lemonade drinks.From the previous problem, is organic lemonade a normal or an inferior good?

Data from the Bureau of Labor Statistics shows that U.S. income increased by 10% while consumer data shows that the quantity demanded of soft drinks decreased by 2%.

Compute the income elasticity for soft drinks.

Answer 1

1. Percentge change in Netflix subscriptions = [(115-100)/100]*100 = 15%
So, income elasticity = Percentge change in Netflix subscriptions/Percentge change in income = 15%/10% = 1.5

2. It is a normal good because income elasticity is positive.

3. It is income elastic because income elasticity is greater than 1.

4. Percentge change in organic lemonade = [(85-80/80]*100 = 6.25%
So, income elasticity = Percentge change in organic lemonade/Percentge change in income = 6.25%/10% = 0.625

It is a normal good because income elasticity is positive.

Income elasticity = Percentge change in soft drinks/Percentge change in income = -2%/10% = -0.2