Question

6) For U.S. consumers, the income elasticity of demand for fruit juice is 1.1. If the economy enters a recession next year and consumer income declines by 2.5%, what is the expected change in the quantity of fruit juice demanded next year?

A) +27.5% B) -27.5% C) +2.75% D) -2.75%

Answer 1

The correct answer is (D) -2.75%

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

Here It is given that Income decreases by 2.5%. Hence, % change in Income = -2,5(here negative sign indicates that income decreases).

It is also given that, Income elasticity of demand = 1.1

=> Income elasticity of demand = % change in demand/ % change in Income = 1.1

=> % change in demand/ (-2.5) = 1.1

=> % change in demand = -2.5*1.1 = -2.75

Hence, the expected change in the quantity of fruit juice demanded next year = -2.75% (here negative sign indicates that quantity of fruit juice demanded next year decreases).

Hence, the correct answer is (D) -2.75%