Question

In the Lamplight neighborhood of Boblandia, in 2005, 450 apartment units were demanded and average income...

In the Lamplight neighborhood of Boblandia, in 2005, 450 apartment units were demanded and average income was 93,000 Bobos. In 2009, 390 units where demanded and average income was 108,000 Bobos. Assuming the only difference between 2005 and 2009 was a change in average income, what is income elasticy of demand?

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Answer #1

Income elasticity of demand measures the sensitivity of a product to a change in income.

Income elasticity of demand = %change in quantity / %change in price

= % change in quantity = change in quantity/original demand

= (450 - 390) / 450

= 60 / 450

= 13.33%

% change in income

= Change in income / original income

= (93000 - 108,000)/108,000

= -15,000/108,000

= -13.9%

Income elasticity of demand = 13.33/(-13.9)

= -0.959

Income elasticity is negative because increase in income caused the decrease in demand.

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