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The table below shows the various incomes and demand for different commodities. a) Calculate the income elasticity between i) A and B ii) C and D iii) E and F. b) What kind of goods is between i) A and B ii) C and D?
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Step-by-step solution
12 stepsTo calculate the income elasticity of demand (YED), we use the arc elasticity formula:
Where and are the initial quantity and income, and and are the new quantity and income.
Part a· 12 steps
Calculate the Income elasticity between
- i) A and B
Identify initial and new values.
$Y_1 = 10,000$, $Q_1 = 60$ $Y_2 = 18,000$, $Q_2 = 48$Calculate the percentage change in quantity demanded.
$$ \frac{Q_2 - Q_1}{(Q_2 + Q_1)/2} = \frac{48 - 60}{(48 + 60)/2} = \frac{-12}{108/2} = \frac{-12}{54} = -\frac{2}{9} $$Calculate the percentage change in income.
$$ \frac{Y_2 - Y_1}{(Y_2 + Y_1)/2} = \frac{18,000 - 10,000}{(18,000 + 10,000)/2} = \frac{8,000}{28,000/2} = \frac{8,000}{14,000} = \frac{8}{14} = \frac{4}{7} $$Calculate the Income Elasticity of Demand.
$$ YED_{AB} = \frac{-2/9}{4/7} = -\frac{2}{9} \times \frac{7}{4} = -\frac{14}{36} = -\frac{7}{18} $$ $$ YED_{AB} \approx -0.3889 $$ The income elasticity between A and B is $\boxed{-\frac{7}{18}}$.- ii) C and D
Identify initial and new values.
$Y_1 = 20,000$, $Q_1 = 80$ $Y_2 = 22,000$, $Q_2 = 100$Calculate the percentage change in quantity demanded.
$$ \frac{Q_2 - Q_1}{(Q_2 + Q_1)/2} = \frac{100 - 80}{(100 + 80)/2} = \frac{20}{180/2} = \frac{20}{90} = \frac{2}{9} $$Calculate the percentage change in income.
$$ \frac{Y_2 - Y_1}{(Y_2 + Y_1)/2} = \frac{22,000 - 20,000}{(22,000 + 20,000)/2} = \frac{2,000}{42,000/2} = \frac{2,000}{21,000} = \frac{2}{21} $$Calculate the Income Elasticity of Demand.
$$ YED_{CD} = \frac{2/9}{2/21} = \frac{2}{9} \times \frac{21}{2} = \frac{21}{9} = \frac{7}{3} $$ $$ YED_{CD} \approx 2.3333 $$ The income elasticity between C and D is $\boxed{\frac{7}{3}}$.- iii) E and F
Identify initial and new values.
$Y_1 = 22,500$, $Q_1 = 120$ $Y_2 = 25,500$, $Q_2 = 126$Calculate the percentage change in quantity demanded.
$$ \frac{Q_2 - Q_1}{(Q_2 + Q_1)/2} = \frac{126 - 120}{(126 + 120)/2} = \frac{6}{246/2} = \frac{6}{123} $$Calculate the percentage change in income.
$$ \frac{Y_2 - Y_1}{(Y_2 + Y_1)/2} = \frac{25,500 - 22,500}{(25,500 + 22,500)/2} = \frac{3,000}{48,000/2} = \frac{3,000}{24,000} = \frac{1}{8} $$Calculate the Income Elasticity of Demand.
$$ YED_{EF} = \frac{6/123}{1/8} = \frac{6}{123} \times 8 = \frac{48}{123} = \frac{16}{41} $$ $$ YED_{EF} \approx 0.3902 $$ The income elasticity between E and F is $\boxed{\frac{16}{41}}$.
Part b
What kind of goods is between
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i) A and B The income elasticity of demand between A and B is . Since the income elasticity is negative (), the good is an inferior good.
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ii) C and D The income elasticity of demand between C and D is . Since the income elasticity is positive and greater than 1 (), the good is a luxury good (or income-elastic normal good).
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