Question

Assume that a 6 percent increase in income in the economy produces a 3 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is

Answer 1

Income elasticity of demand indicates us the percentage change in quantity demanded for each 1 percent change in the income of the consumer. Here the income of the consumer increases by 6 percent. Hence, as a result the quantity demanded rises by 3 percent for good X. This makes the coefficient of income elasticity of demand equal to

em = % change in QD/% change in M = 3%/6% = 0.5

Hence, coefficient of income elasticity of demand is 0.5 and is positive reflecting that good X is a normal good.