(a) What is income elasticity of demand? The table below shows the various incomes and...

Explanation

(a) Income elasticity of demand is the degree of responsive-ness of the quantity demanded of a commodity to a little change in income. Income elasticity of demand can be expressed as:% change in quantity dd

% change in income

(b)(i) Income elasticity between A and B

= Change in quantity dd 96 - 120 = -24

%Change in quantity dd = \(\frac{-24}{120} \times \frac{100}{1}\) = - 20%

Change in income = N36,000 - N20,000 = N16,000

% change in income = \(\frac{16000}{20000} \times \frac{100}{1}\) = 80%

Income elasticity of dd = \(\frac{20}{80}\) = 0.25

(ii) Calculation of Income Elasticity between C and D

Change in quantity = 200 - 160 = 40 %

% change in quantity = \(\frac{40}{160} \times \frac{100}{1}\) = 25%

Change in income = 44000 - 40,000 = 4,000

% Change in income = \(\frac{4000}{40000} \times \frac{100}{1}\) = 10%

Income elasticity of dd = \(\frac{25}{10}\) = 2.5

(iii) Calculation of Income Elasticity between E and F

Change in quantity = 252 - 240 = 12

% Change in quantity = \(\frac{12}{240} \times \frac{100}{1}\)% = 5%

Change in income = 47,000 - 45,000 = 2000

% Change in income = \(\frac{2000}{45000} \times \frac{100}{1} = \frac{40}{9}\) = 4.4%

Income elasticity of dd = \(\frac{5}{4.4}\) = 1.1

Alternative method of solving Question 2(b)

Ey =dd x y

dy q

where dq = change in quantity

dy = change in income

y = old income

q = old quantity

(i) Elasticity between A and B

change in quantity = 96 - 120 = 24

change in quantity = N36,000 - N20,000 = N16,000

old income = 20,000

old quantity = 120

= \(\frac{24}{16000} \times \frac{20,000}{120}\) = 0.25

(ii) Between C and D

dq = 160 - 200 = 40

dy =N40,000 -N44,000 = 4,000

y = 40,000

q = 160

= \(\frac{40}{4000} \times \frac{40,000}{160}\) = 2.5

(iii) Between E and F

2q = 240 - 252 =12

2y = 45,000 - N47,000 = 42,000

y = N45,000, q = 240

= \(\frac{12}{2000} \times \frac{45,000}{240}\) = 1.1

(c)(i) Inferior or giffen good

(ii) Normal good and luxury good