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Johnny Clutch just got a raise from \$900 per week to \$1100 per week. As a result, he decreases the amount of ramen noodles he buys from seven cartons a week to one carton a week. For Johnny, ramen noodles are:
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4. Elasticity
Income Elasticity of Demand
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Johnny Clutch just got a raise from \$950 per week to \$1,050 per week. As a result, he increases the number of concerts he attends by five percent. His demand for concerts is:
A
Income elastic
B
Income inelastic
C
A horizontal line
D
A vertical line
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Understand the concept of income elasticity of demand, which measures how the quantity demanded of a good responds to a change in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.
Calculate the percentage change in Johnny's income. His income increased from \$950 to \$1,050 per week. Use the formula: \( \text{Percentage Change in Income} = \frac{\text{New Income} - \text{Old Income}}{\text{Old Income}} \times 100 \).
Calculate the percentage change in the number of concerts Johnny attends. According to the problem, this change is five percent.
Determine the income elasticity of demand using the formula: \( \text{Income Elasticity of Demand} = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Income}} \).
Interpret the result: If the income elasticity is less than 1, the demand is income inelastic, meaning the percentage change in quantity demanded is less than the percentage change in income. If it is greater than 1, the demand is income elastic.
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