Chapter 48, Problem 2MCQ

To determine

Income elasticity of demand by using midpoint method when K buys 200 units of good X at the time when her income is $20,000 and 300 unit at $25,000 of income.

Explanation of Solution

  $\begin{array}{c}\text{Income elasticity of demand = }\frac{\left(\text{Q2 - Q1}\right)\text{ / }\left[\left(\text{Q2 + Q1}\right)\text{ / 2}\right]}{\left(\text{R2 - R1}\right)\text{ / }\left[\left(\text{R2 + R1}\right)\text{ / 2}\right]}\\ \text{= }\frac{\left(\text{300 - 200}\right)\text{ / }\left[\left(\text{300 + 200}\right)\text{ / 2}\right]}{\left(\text{25000 - 20000}\right)\text{ / }\left[\left(\text{250000 + 20000}\right)\text{ / 2}\right]}\\ \text{= }\frac{\text{100 /250}}{\left(\text{5000/22500}\right)}\\ \text{= }\frac{\text{0}\text{.4}}{\left(\text{0}\text{.22}\right)}\\ \text{= 1}\text{.8}\end{array}$

Income elasticity of demand would be 1.8. Therefore, the correct option is d.

Economics Concept Introduction

Introduction:

Income elasticity of demand represents the measure of sensitivity of demand to income that shows how change in income affects the quantity demanded.

Midpoint method is used to calculate elasticity by using the average percentage change in quantity and average percentage change in price.