The quantity demanded of Good A has recently increased by 2% in response to an increase in income. By how much must income have increased (as a percentage) for the income elasticity of demand to equal 0.2?

Question

Business

Jimmy Barry

16 May, 00:52

The quantity demanded of Good A has recently increased by 2% in response to an increase in income. By how much must income have increased (as a percentage) for the income elasticity of demand to equal 0.2?

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Answers (1)

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Edgar Mayo · Answer 1

Income must have increased by 10%

Explanation:

To find the answer, we use the Income Elasticity of Demand (IED) formula:

IED = Change in quantity demanded / change in income

Now, we plug the amounts into the formula and solve:

0.2 = 0.02 / X

0.2 * X = (0.02 / X) * X

0.2X = 0.02

0.2X*100 = 0.02*100

20X = 2

20X/20 = 2/20

X = 1/10

X = 0.1

X = 10%