Last year,Olivia bought 6 pairs of shoes when her income was $50,000.This year,her income is $55,000,and she purchased 8 pairs of shoes.Holding other factors constant and using the midpoint method,it follows that Olivia's income elasticity of demand is about
A) 0.33,and Olivia regards shoes as an inferior good.
B) 0.33,and Olivia regards shoes as a normal good.
C) 3.00,and Olivia regards shoes as an inferior good.
D) 3.00,and Olivia regards shoes as a normal good.

Question

Quizplus · Accepted Answer

Using midpoint method formula,

Income Elasticity of Demand = ((Q2-Q1)/((Q2+Q1)/2)) / ((I2-I1)/((I2+I1)/2))

Where,

Q1 = 6 (Quantity of shoes bought last year)
Q2 = 8 (Quantity of shoes bought this year)
I1 = $50,000 (Income last year)
I2 = $55,000 (Income this year)

Putting the values in the formula, we get:

Income Elasticity of Demand = ((8-6)/((8+6)/2)) / (($55,000-$50,000)/(($55,000+$50,000)/2))

Income Elasticity of Demand = (2/7) / (5,000/52,500)

Income Elasticity of Demand = 0.857

Since the Income Elasticity of Demand is greater than 1, it means shoes are a luxury/normal good for Olivia. Therefore, the correct answer is D.

Last Year,Olivia Bought 6 Pairs of Shoes When Her Income