Question

Suppose a market’s demand and supply curves take on the following characteristics:

QD = 100 – 2.5(P) + 0.95(Y – T) QS = 2(P)
  if personal taxes (T) equal zero and personal income (Y) is $500?

Suppose personal income rose by 10 percent. Using the tax rate of 20 percent introduced originally

, a. What is the impact on the equilibrium price and quantity previously calculated in question 2?

b. What is the income elasticity of demand? What does this calculated elasticity indicate about this product?

Answer 1

income elasticity of demand is % change in demand due to % change in income of a product.

The ans of 1.8587 shows that if income change by 1 ... The demand increases by 1.8587

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