Question

Assume the supply of a good is perfectly elastic and the income elasticity of demand is 16.3. When the income of households increases by 2%, the equilibrium quantity in the market will:

Select one:

a. increase by 16.3%

b. decrease by 16.3%

c. increase by 2%

d. decrease by 16.3*2%

e. increase by 16.3*2%

Answer 1

Solution:-

Income elasticity of demand is an economic measure of how responsive the quantity demand for a good or service is to a change in income.

The formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income.

.Income elasticity of demand measures the responsiveness of demand for a particular good to changes in consumer income. The higher the income elasticity of demand in absolute terms for a particular good, the bigger consumers' response in their purchasing habits—if their real income changes. Businesses typically evaluate income elasticity of demand for their products to help predict the impact of a business cycle on product sales.

As income increses people will purchses more, that means quantity demanded increases,as increase in income.

Refering to all above information

Ans:-C.increase by 2%.