Suppose a consumers demand function is dependent on both prices and income and takes the form:...
Suppose a consumers demand function is dependent on both prices and income and takes the
form: Qd=500-40P+(1/10)*I (I= income here.) We also know the supply function: Qs=50P+100.
What is income elasticity when Income = 1000?
Homework Answers
Demand function is Qd = 500 - 40P + (1/10)*I
At I = 1000, we have Qd = 500 - 40P + 1000/10 which gives Qd = 600 - 40P
Supply function is Qs = 50P + 100
Find equilibrium quantity
Qd = Qs
600 - 40P = 50P + 100
500 = 90P
P = 5.55
Q = 377.77
Income elasticity = dQ/dI * I/Q
= (1/10)*(1000/377.77)
= 0.265
Hence income elasticity is +0.265
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