The income elasticity of demand for peaches has been estimated to be 1.43.If income grows by 15 percent in a period, how will that affect total expenditures on peaches in that period, all other things unchanged?
A) total expenditures will rise
B) total expenditures will fall
C) total expenditures will remain unchanged
D) not enough information is given to answer the question

Question

Quizplus · Accepted Answer

The income elasticity of demand being 1.43 suggests that peaches are a normal good (since income elasticity is positive) and a 15% increase in income will cause the demand for peaches to increase by 1.43 x 15% = 21.45%. Since total spending on peaches will increase as a result of the increase in demand, total expenditures on peaches will rise. Therefore, the correct answer is A.

The Income Elasticity of Demand for Peaches Has Been Estimated