A consumer's monthly income rises from ₹20,000 to ₹25,000, and her monthly demand for a normal good rises from 40 units to 46 units, price remaining unchanged. Calculate the income elasticity of demand and state the type of good.

Question

Accepted Answer

**Given:** $Y_1 = ₹20{,}000$, $Y_2 = ₹25{,}000$, so $\Delta Y = ₹5{,}000$.
$Q_1 = 40$ units, $Q_2 = 46$ units, so $\Delta Q = 6$ units.

**Step 1 — percentage change in quantity demanded:**
$$\%\ \Delta Q = \frac{6}{40}	imes100 = 15\%$$

**Step 2 — percentage change in income:**
$$\%\ \Delta Y = \frac{5{,}000}{20{,}000}	imes100 = 25\%$$

**Step 3 — income elasticity:**
$$E_y = \frac{\%\Delta Q}{\%\Delta Y} = \frac{15}{25} = 0.6$$

**Independent cross-check (direct-ratio form):** $E_y = \frac{\Delta Q}{\Delta Y}	imes\frac{Y}{Q} = \frac{6}{5{,}000}	imes\frac{20{,}000}{40} = 0.0012 	imes 500 = 0.6$. Both methods agree. …

Value of $E_y$	Type of good	Meaning
$E_y < 0$ (negative)	Inferior good	Demand falls as income rises (e.g. coarse grain, second-hand goods)
$E_y = 0$	Neutral	Demand unaffected by income (e.g. salt)
$0 < E_y < 1$	Normal — necessity	Demand rises, but less than proportionately (e.g. food, basic clothing)
$E_y = 1$	Unitary	Demand rises in the same proportion as income

Q.A consumer's monthly income rises from ₹20,000 to ₹25,000, and her monthly demand for a normal good rises from 40 units to 46 units, price remaining unchanged. Calculate the income elasticity of demand and state the type of good.

Concept understanding — Income Elasticity of Demand

The formula and a worked illustration

Interpreting the values

Q.A consumer's monthly income rises from ₹20,000 to ₹25,000, and her monthly demand for a normal good rises from 40 units to 46 units, price remaining unchanged. Calculate the income elasticity of demand and state the type of good.

🎓Unlock everything free for 14 days

Unlock everything free for 14 days