Question

When the Joan had a monthly income of $6000, they would usually eat out twelve times a month. Now that the couple makes $7500 a month, they eat out sixteen times a month. Compute the couple's income elasticity of demand using the midpoint method. Explain your answer. (Is a restaurant meal a normal or inferior good to the couple?)

Answer 1

income elasticity of demand = %age change in demand / %age change in income

income elasticity of demand = [(q2-q1)/((q2+q1)/2)] / [(p2-p1)/((p2+p1)/2)]

here q2 = 16 , p2 = 7500

q1 = 12 , p1 = 6000

income elasticity of demand = [(16-12)/((16+12)/2)] / [(7500-6000)/((7500+6000)/2)]

= [ 4 / 14] / [ 1500 / 6750 ]

= 0.285714286 / 0.22222222

= 1.285714 ~ 1.29

As income elasticity of demand > 0, it is a normal good

By definition, when a consumption of a good increases when income increases, good is a normal good