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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?

Economics

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Answer

a

−718-\frac{7}{18}

73\frac{7}{3}

1641\frac{16}{41}

Step-by-step solution

12 steps

To calculate the income elasticity of demand (YED), we use the arc elasticity formula:

YED=Q2−Q1(Q2+Q1)/2Y2−Y1(Y2+Y1)/2YED = \frac{\frac{Q_2 - Q_1}{(Q_2 + Q_1)/2}}{\frac{Y_2 - Y_1}{(Y_2 + Y_1)/2}}

Where Q1Q_1 and Y1Y_1 are the initial quantity and income, and Q2Q_2 and Y2Y_2 are the new quantity and income.

Part a· 12 steps

Calculate the Income elasticity between

  • i) A and B
  1. Identify initial and new values.

    $Y_1 = 10,000$, $Q_1 = 60$  
    $Y_2 = 18,000$, $Q_2 = 48$
    
  2. Calculate the percentage change in quantity demanded.

    $$
    \frac{Q_2 - Q_1}{(Q_2 + Q_1)/2} = \frac{48 - 60}{(48 + 60)/2} = \frac{-12}{108/2} = \frac{-12}{54} = -\frac{2}{9}
    $$
    
  3. Calculate the percentage change in income.

    $$
    \frac{Y_2 - Y_1}{(Y_2 + Y_1)/2} = \frac{18,000 - 10,000}{(18,000 + 10,000)/2} = \frac{8,000}{28,000/2} = \frac{8,000}{14,000} = \frac{8}{14} = \frac{4}{7}
    $$
    
  4. 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
  5. Identify initial and new values.

    $Y_1 = 20,000$, $Q_1 = 80$  
    $Y_2 = 22,000$, $Q_2 = 100$
    
  6. Calculate the percentage change in quantity demanded.

    $$
    \frac{Q_2 - Q_1}{(Q_2 + Q_1)/2} = \frac{100 - 80}{(100 + 80)/2} = \frac{20}{180/2} = \frac{20}{90} = \frac{2}{9}
    $$
    
  7. Calculate the percentage change in income.

    $$
    \frac{Y_2 - Y_1}{(Y_2 + Y_1)/2} = \frac{22,000 - 20,000}{(22,000 + 20,000)/2} = \frac{2,000}{42,000/2} = \frac{2,000}{21,000} = \frac{2}{21}
    $$
    
  8. 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
  9. Identify initial and new values.

    $Y_1 = 22,500$, $Q_1 = 120$  
    $Y_2 = 25,500$, $Q_2 = 126$
    
  10. Calculate the percentage change in quantity demanded.

    $$
    \frac{Q_2 - Q_1}{(Q_2 + Q_1)/2} = \frac{126 - 120}{(126 + 120)/2} = \frac{6}{246/2} = \frac{6}{123}
    $$
    
  11. Calculate the percentage change in income.

    $$
    \frac{Y_2 - Y_1}{(Y_2 + Y_1)/2} = \frac{25,500 - 22,500}{(25,500 + 22,500)/2} = \frac{3,000}{48,000/2} = \frac{3,000}{24,000} = \frac{1}{8}
    $$
    
  12. 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

  • i) A and B The income elasticity of demand between A and B is YEDAB=−718≈−0.3889YED_{AB} = -\frac{7}{18} \approx -0.3889. Since the income elasticity is negative (YED<0YED < 0), the good is an inferior good.

  • ii) C and D The income elasticity of demand between C and D is YEDCD=73≈2.3333YED_{CD} = \frac{7}{3} \approx 2.3333. Since the income elasticity is positive and greater than 1 (YED>1YED > 1), the good is a luxury good (or income-elastic normal good).

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