Chapter 19, Problem 13P

To determine

An individual's income rises from $80,000 per year to $84,000 per year, and as a consequence, the person's purchases of movie downloads rise from 48 per year to 72 per year. What is this individual's income elasticity of demand? Are movie downloads a normal or inferior good? (Hint: you may want to refer to the discussion of normal and inferior goods in chapter 3)

Concept Introduction:

Income elasticity of demand: It refers to the degree of responsiveness to change in the quantity demanded due to change in income of the consumer. It can be calculated as:

$e_{x,i}=\frac{\Delta Q}{\Delta I}\times \frac{I}{Q}$

Where, $\Delta Q=$ Change in Quantity demanded (= New Quantity demanded − Initial Quantity demanded)

$\Delta I=$ Change in Income (= New Income − Old Income)

I and Q = Initial Income and Quantity demanded.

If the income elasticity comes out to be positive, then the good is said to be normal good [when the income increases (or decreases), the demand for normal good also rises (or falls)].

If the income elasticity comes out to be negative, then the good is said to be an inferior good [when the income increases (or decreases), the demand for inferior good falls (or rises)]