Consider a local car dealership that gathers data on changes in demand and consumer income for...
Consider a local car dealership that gathers data on changes in demand and consumer income for its cars for a particular year. When the average real income of its customers falls 20%, the sale of new cars plummets 40%, all other things unchanged. However, the sale of used cars increases by 10%. Calculate and interpret the income elasticity of demand for new and used cars. Show your work.
Homework Answers
The income elasticity of demand measures the percentage change in quantity demanded due to one percentage change in income of the consumer. This is calculated as
The income elasticity determines the type of good, such as a negative income elasticity implies an inferior good. A positive and less than 1 income elasticity defines a necessity good. A positive and greater than 1 income elasticity defines a luxury good.
In the case of the new cars, the income elasticity of demand is
Therefore, the new car is a normal luxury good for the consumer.
In the case of the used cars, the income elasticity of demand is
Therefore, the used car is an inferior good to the consumer.
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Consider a local car dealership that gathers data on
changes in demand and consumer income for...
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