After Mr.Jones retired from teaching his average income decreased from approximately $40 000 to $24 000. At the same time his consumption of Chicken Pie went up from 2 boxes a month to 10 boxes every month.
a)calculate the income elasticity of demand
b)what information does the elasticity coefficient give us about Mr.Jones's view of Chicken Pies?
Feb 11th 2008, 04:08 PM
You've asked a similar type of question on another thread which simply involves applying formulae which you should have been given in class or you can search up in textbooks.
The formula for the Income Elasticity of Demand (IED) for a good is:
IED = (proportional change in demand of a good) divided by (proportional change in income)
(a) Try to apply the formula given above. All the information you need is given in the question. A useful way of remembering how to calculate the 'proportional change' is . i.e. if the demand of a good rises from 4 to 5, then the proportional change in demand would be given by .
Now try to adapt this for the numbers given and use the formula.
(b) Bear in mind that, if the IED coefficient is:
>1, then the good can be considered to be a 'superior' good i.e. the proportional change in consumption is greater than the proportional change in income.
0 < x < 1, then the good is a normal good. i.e. consumption of the good rises as income increases.
x < 0 , then the good is an inferior good. Consumption of the good actually falls as incomes rises.
If you're not happy with your answer, if you can - try to post your working so far. :)
Feb 11th 2008, 05:01 PM
here's what I have so far...
Feb 11th 2008, 05:12 PM
Originally Posted by chinky
You need to be careful here. What is the 'original', and what's the difference? I perhaps should've made myself more clear by what is meant by 'difference'. The 'difference' is the new quantity minus the original. So in this case, it's
Just correcting your error above, you'll get the IED coefficient to be
(b) Now what do you think this information infers? Well if you use the guide I provided above, you'll see that in this case, the value is <0 (i.e. negative) so therefore for Mr. Jones, Chicken Pies is an inferior good. i.e. When his income falls, his consumption rises (which is what has happened in this case).
Feb 11th 2008, 05:27 PM
Hey WWTL! Thanks for your help I really appreciate it. (Wink)