Which of the following best explains how income elasticity of demand could affect why Jeremy earns more money than Rose?

• A. Jeremy works in an industry where the demand for goods is highly income elastic, so as incomes rise, demand and wages increase.
• B. Rose earns more money because she works fewer hours than Jeremy.
• C. Rose works in an industry where the demand for goods is perfectly inelastic, so her wages do not change with income.
• D. Jeremy and Rose both work in industries with negative income elasticity, so their wages decrease as income rises.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of income elasticity of demand, which measures how the quantity demanded of a good responds to a change in consumer income. It is calculated as \(\text{Income Elasticity} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}\).
2. Step 2: Recognize that if a good has high positive income elasticity, demand for that good increases significantly as consumer incomes rise. This can lead to higher revenues and potentially higher wages in industries producing those goods.
3. Step 3: Analyze Jeremy's situation: since he works in an industry with highly income elastic demand, as incomes rise, demand for his industry's goods increases substantially, which can drive up wages in that industry.
4. Step 4: Contrast this with Rose's situation: if she works in an industry where demand is perfectly inelastic or has negative income elasticity, demand for her industry's goods does not increase (or even decreases) as incomes rise, so wages in her industry are less likely to increase.
5. Step 5: Conclude that Jeremy earns more because his industry's wages respond positively to rising incomes due to high income elasticity of demand, while Rose's wages do not increase similarly because of the nature of demand in her industry.