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21 April, 10:38

Blake eats two bags of generic potato chips each day, and does not purchase any name-brand chips. Blake's hourly wage increases from $ 8 to $ 15, and he decides to eat one name-brand bag and one generic-brand bag each day. Calculate Blake's income elasticity of demand for generic potato chips. Vacations are a (n) normal good. As a good, vacations are income-elastic. Generic potato chips are a (n) inferior good. As a good, generic potato chips are neither income-elastic nor income-inelastic.

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  1. 21 April, 11:11
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    -1.10; Generic potato chips are a (n) inferior good.

    Explanation:

    Initial income = $8

    New income = $15

    Initial demand = 2

    New demand = 1

    Average income:

    = (Initial income + New income) : 2

    = ($8 + $15) : 2

    = $11.5

    Change in income:

    = (New income - Initial income) : Average income

    = ($15 - $8) : $11.5

    = 0.61

    Average quantity demanded:

    = (Initial demand + New demand) : 2

    = (2 + 1) : 2

    = 1.5

    Change in Quantity demanded:

    = (New demand - Initial demand) : Average Quantity demanded

    = (1 - 2) : 1.5

    = - 0.67

    Blake's income elasticity of demand for generic potato chips:

    = Change in Quantity demanded : Change in income

    = - 0.67 : 0.61

    = - 1.10

    Therefore, the demand for generic potato chips is negative income elastic.

    Hence, the Generic potato chips are an inferior good.
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