Elasticity Lesson 3

Income Elasticity

Income elasticity will provide data regarding changes in income and the quantity demanded of a good.  As the income of an individual goes up by a certain percent - what happens to the quantity demanded of certain goods?  We know that elasticity will tell us if the good is responsive or not however Income Elasticity also will tell us if a good is an inferior good or a normal good.

Let's practice Income Elasticity:

  1. Calculate Income Elasticity using the table below.  What does the answer tell you?  What policy should the government follow when trying to raise taxes on this item?  Why?
    IncomeQUANTITY of Good B
    $
    $
  2. You know that the value of Income Elasticity for Iphones is 2.5 and you just read that Income for US workers went up by 10% - what do you expect will happen to the quantity demanded of Iphones?  Why?
  3. Calculate Income Elasticity using the table below. Is this an inferior good?  Why?
    IncomeQUANTITY of Good B
    $
    $