Question

Could you answer these questions?

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Explain how the elasticity of income can be used by businesses 7. Assume that the government levied a different economics effects of the tax (and compute the dwl and tax burden) Who is paying more of the tax and why? Exercise C Homes' demand curve for wheat is P-40-1/2(QD) and supply is p- 10+ 1/2 (Qs) 1) Determine the price of wheat in the absence of trade and economic surplus (consumer surplus and producer surplus). Il) Illustrate graphically the different economic effects if citizens of home are allowed to buy the wheat in foreign markets and the world price is $20. II) Compute the economic surplus and the consumer surplus.

Answer 1

The elasticity of income or income elasticity of demand indicates the responsiveness of quantity demanded with respect to changes in income of consumers. Income elasticity is the ratio of the % change in quantity demanded and the % change in income. The demand is income inelastic when the % change in quantity demanded is smaller than the % change in price. However, the demand is income elastic when the % change in quantity demanded is greater than the % change in income. Businesses can use the concept of income elasticity to predict the level of sales when there is a change in income of people. In case the demand is income inelastic, rise or fall in income will not affect sales significantly. However, when the demand is income elastic, there will be a significant change in sales due to changes in income of consumers. Therefore, businesses can predict the sales of goods and services with a change in income with the concept of income elasticity.