Question

please show how you set up the problem and solve thank you

Problem 2: A) A married couple spent $8000 for travel in 2007 when their combined income was $100,000. When the husband lost his job due to the recession, the combined income dropped to $80,000 and the couple spent only $5000 for travel. Please estimate the couple's income elasticity. Would you term this elasticity as elastic or inelastic? B) The husband is now back to work and the couple estimates their income to have increased by 40%. Please estimate the couple's travel budget for the upcoming year based on the following: 1. The income elasticity you estimated above in (A) 2. The 40% increase in the couple's income. n Arco nonr TTY

Answer 1

Ans :

Both are doing Job -

Married couple combine income = 100000$ then expanse demanded for travel = 8000$

when husband lost job then,

Married couple combine income = 80000$ then expanse demanded for travel = 5000$

(A) Percentage change income = (change in income / initial income) * 100

= {(80000 - 100000)/100000} * 100

= - 20% ( - indicate reduction in income)

Percentage change demand  = (change in expense / initial expense) * 100

= {(5000-8000)/8000) * 100

= - 37.5% ( - indicate reduction in demand)

Income Elasticity of Demand = Change in Demand%\ Change in Income

= 37.5 / 20 = 1.875 Ans

This elasticity is inelastic because of the it's greater then 1.  This means that consumer demand down less proportionately in response to an reduction in income..

(B) Husband back in work and income rise 40% take previous ans elasticity

Married couple combine income = 1.4* 100000$= 140000$ then expanse demanded for travel = ?

Percentage change income = (change in income / initial income) * 100

= {(140000 - 100000)/100000} * 100

= 40% ( indicate rise in income)

Income Elasticity of Demand = Change in Demand%\ Change in Income

1.875 = % change demand / 40

% change demand = 1.875*40 = 75

(change in expense / initial expense) * 100 = 75

{(final expense - 8000)/ 8000 )} = 0.75

final travel expenses =( 0.75* 8000)+8000

= 14000 $ Ans.