Question

If Marianne's income rises by 5% and her consumption of bus rides decreases by 3%, calculate Marianne’s income elasticity of demand for bus rides. (Pay attention to the sign.)

Answer 1

The formula for Income Elasticity of Demand is

Therefore Percentage change in quntity demand decreases by 3% which is eaual to = -3%

and Percentage change in income increases by 5% which is equal to = +5%

Therefore Income Elasticity of Demand = -3%/+5%. =. -0.6

We get a negative income elasticity of demand when the income percentage increases with decrease in percentage change in quantity demand. These are known as inferior goods.