Last year,Tess bought 5 handbags when her income was $54,000.This year,her income is $60,000,and she purchased 7 handbags.Holding other factors constant,it follows that Tess's income elasticity of demand is about
A)0.32,and Tess regards handbags as inferior goods.
B)0.32,and Tess regards handbags as normal goods.
C)3.17,and Tess regards handbags as inferior goods.
D)3.17,and Tess regards handbags as normal goods.

Question

Quizplus · Accepted Answer

To calculate the income elasticity of demand, we use the formula:

Income Elasticity of Demand = % Change in Quantity Demanded / % Change in Income

First, let's calculate the % change in quantity demanded:

% Change in Quantity Demanded = [(New Quantity Demanded - Old Quantity Demanded) / Old Quantity Demanded] x 100

% Change in Quantity Demanded = [(7-5)/5] x 100
% Change in Quantity Demanded = 40%

Next, let's calculate the % change in income:

% Change in Income = [(New Income - Old Income) / Old Income] x 100

% Change in Income = [(60,000 - 54,000) / 54,000] x 100
% Change in Income = 11.11%

Now we can calculate the income elasticity of demand:

Income Elasticity of Demand = 40% / 11.11%

Income Elasticity of Demand = 3.6

Since the income elasticity of demand is greater than 1, we know that the good is a normal good. Therefore, the correct answer is D: 3.17 and Tess regards handbags as normal goods.

Last Year,Tess Bought 5 Handbags When Her Income Was $54,000