Question

3. Calculate the point income elasticity of demand for the function. Q = 5000 – 20P+42Y –.0015Y2 For what values of Y will this be a normal good? For what values of Y will this be an inferior good?

Answer 1

Y	P	Q	% Change in Y	% Change in Q	Ed	Status
1000	10	45300				Normal
2000	10	82800	1.00	0.83	0.83	Normal
3000	10	117300	0.50	0.42	0.83	Normal
4000	10	148800	0.33	0.27	0.81	Normal
5000	10	177300	0.25	0.19	0.77	Normal
6000	10	202800	0.20	0.14	0.72	Normal
7000	10	225300	0.17	0.11	0.67	Normal
8000	10	244800	0.14	0.09	0.61	Normal
9000	10	261300	0.13	0.07	0.54	Normal
10000	10	274800	0.11	0.05	0.46	Normal
11000	10	285300	0.10	0.04	0.38	Normal
12000	10	292800	0.09	0.03	0.29	Normal
13000	10	297300	0.08	0.02	0.18	Normal
14000	10	298800	0.08	0.01	0.07	Normal
15000	10	297300	0.07	-0.01	-0.07	Inferior
16000	10	292800	0.07	-0.02	-0.23	Inferior
17000	10	285300	0.06	-0.03	-0.41	Inferior
18000	10	274800	0.06	-0.04	-0.63	Inferior
19000	10	261300	0.06	-0.05	-0.88	Inferior
20000	10	244800	0.05	-0.06	-1.20	Inferior
21000	10	225300	0.05	-0.08	-1.59	Inferior
22000	10	202800	0.05	-0.10	-2.10	Inferior
23000	10	177300	0.05	-0.13	-2.77	Inferior
24000	10	148800	0.04	-0.16	-3.70	Inferior
25000	10	117300	0.04	-0.21	-5.08	Inferior
26000	10	82800	0.04	-0.29	-7.35	Inferior

From the above table we can observe that at Y = 14000, the good is normal good (with the increase in income the Y increases, also the Income Ed is less than zero)

At Y greater than 14000, the good is inferior good (with the increase in income the Y decreases, also the Income Ed is negative)