Scenario 5-1
Suppose that when the average college student's income is $10,000 per year,the annual quantity demanded of Patty's Pizza is 50 and the annual quantity demanded of Sue's Subs is 80.Suppose that when the price of Patty's Pizza increases from $8 to $10 per pie,the quantity demanded of Sue's Subs increases from 80 to 100.Suppose also that when the average student's income increases to $12,000 per year,the annual quantity demanded of Patty's Pizza increases from 50 to 60.
-Refer to Scenario 5-1.Using the midpoint method,what is the income elasticity of demand for pizza and what does the value indicate about the demand for pizza?
A)The income elasticity is 0.18 so pizza is a normal good.
B)The income elasticity is -1 so pizza is an inferior good.
C)The income elasticity is 1 so pizza is unitary elastic.
D)The income elasticity is 1 so pizza is a normal good.

Question

Quizplus · Accepted Answer

Using the midpoint method formula:
Income elasticity of demand for pizza = ((60-50) / ((60+50)/2)) / ((12,000-10,000) / ((12,000+10,000)/2)) 
= (0.10 / (2,000/11,000)) 
= 0.605
Since the value is greater than zero and less than 1, it indicates that pizza is a normal good, meaning that as income increases, the demand for pizza also increases but at a slower rate.

Scenario 5-1 Suppose That When the Average College Student's Income Is $10,000