Suppose that your demand schedule for pizza is as follows:
a. Use the midpoint method to calculate your
b. Calculate your income elasticity of demand as your income increases from $20,000 to $24,000 if (i) the price is $12 and (ii) the price is $16.
Subpart (a):
Price elasticity of demand.
Explanation of Solution
- (i) If the income is $20,000, then the price of pizza rises from $8 to $10, and the quantity demanded decreases from 40 to 32. By midpoint method, the price elasticity of demand is calculated as follows:
The price elasticity of demand for pizza is -1.
- (ii) If the income is $24,000, then the price of pizza rises from $8 to $10, and the quantity demanded decreases from 50 to 45. By midpoint method, the price elasticity of demand is calculated as follows:
The price elasticity of demand for pizza is -0.5.
Concept Introduction:
Price elasticity of demand: Price elasticity of demand refers to the percentage change in the demand for goods and services due to change occurred in the price level.
Subpart (b):
Income elasticity of demand.
Explanation of Solution
- (i) If the price is $12 and an income increases from $20,000 to $24,000, then the quantity demanded increases from 24 to 30. By midpoint method, the income elasticity of demand is calculated as follows:
The income elasticity of demand for pizza is 1.22.
- (ii) If the price is $12 and an income increases from $20,000 to $24,000, then the quantity demanded increases from 24 to 30. By midpoint method, the income elasticity of demand is calculated as follows:
The income elasticity of demand for pizza is 2.22.
Concept Introduction:
Income elasticity of demand: It measures how much quantity demanded of a good responds to the change in consumers’ income.
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