INCOME ELASTICITY OF DEMAND Income elasticity of demand is defined to be the percentage change in quantity purchased divided by the percentage change in real income.
a. Write a formula for income elasticity of demand E in terms of real income I and quantity purchased Q.
b. In the United States, which would you expect to be greater, the income elasticity of demand for cars or for food? Explain your reasoning.
c. What do you think is meant by a negative in- come elasticity of demand? Which of the following goods would you expect to have E < 0: used clothing, personal computers, bus tickets, refrigerators, used cars? Explain your reasoning.
d. Read an article on income elasticity of demand and write a paragraph on why the income elasticity of demand for food is much larger in a developing country than in a country such as the United States or Japan.*
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