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Question
Macroeconomics
Posted 10 months ago

When Eric's income was $500\$ 500 per week he bought 10 fish tacos per week, but when his income increased to $600\$ 600 per week he started buying 15 fish tacos per week.

What is Eric's income elasticity of demand for fish tacos?
Round your answer to the nearest tenth place
Choose 1 answer:
(A) 4
(B) 0.1
(C) 2.5
(D) 0.4
(E) 2
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Answer from Sia
Posted 10 months ago
Solution
a
Calculation of Percentage Change in Quantity Demanded: To calculate the income elasticity of demand, we first need to determine the percentage change in quantity demanded. Using the formula Q2−Q1Q1×100%\frac{Q_2 - Q_1}{Q_1} \times 100\%, where Q1Q_1 is the initial quantity and Q2Q_2 is the final quantity
b
Calculation of Percentage Change in Income: Next, we calculate the percentage change in income using the formula I2−I1I1×100%\frac{I_2 - I_1}{I_1} \times 100\%, where I1I_1 is the initial income and I2I_2 is the final income
c
Calculation of Income Elasticity of Demand: The income elasticity of demand is calculated using the formula EI=Percentage Change in Quantity DemandedPercentage Change in IncomeE_I = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Income}}
d
Applying the Values: Applying the values from the problem, Q1=10Q_1 = 10, Q2=15Q_2 = 15, I1=$500I_1 = \$500, and I2=$600I_2 = \$600, we get the percentage change in quantity demanded as 15−1010×100%=50%\frac{15 - 10}{10} \times 100\% = 50\% and the percentage change in income as 600−500500×100%=20%\frac{600 - 500}{500} \times 100\% = 20\%
e
Final Calculation: Using the values from steps d, we calculate EI=50%20%=2.5E_I = \frac{50\%}{20\%} = 2.5
Answer
2.5
Key Concept
Income Elasticity of Demand
Explanation
Income elasticity of demand measures how the quantity demanded of a good responds to a change in consumers' income, calculated as the percentage change in quantity demanded divided by the percentage change in income. In this case, Eric's income elasticity of demand for fish tacos is 2.5, indicating that fish tacos are a normal good with a relatively high income elasticity.

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