Question

Macroeconomics

Posted 5 months ago

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When Eric's income was $\$ 500$ per week he bought 10 fish tacos per week, but when his income increased to $\$ 600$ 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 5 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 $\frac{Q_2 - Q_1}{Q_1} \times 100\%$, where $Q_1$ is the initial quantity and $Q_2$ is the final quantity

b

Calculation of Percentage Change in Income: Next, we calculate the percentage change in income using the formula $\frac{I_2 - I_1}{I_1} \times 100\%$, where $I_1$ is the initial income and $I_2$ is the final income

c

Calculation of Income Elasticity of Demand: The income elasticity of demand is calculated using the formula $E_I = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Income}}$

d

Applying the Values: Applying the values from the problem, $Q_1 = 10$, $Q_2 = 15$, $I_1 = \$500$, and $I_2 = \$600$, we get the percentage change in quantity demanded as $\frac{15 - 10}{10} \times 100\% = 50\%$ and the percentage change in income as $\frac{600 - 500}{500} \times 100\% = 20\%$

e

Final Calculation: Using the values from steps d, we calculate $E_I = \frac{50\%}{20\%} = 2.5$

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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