As the average hourly wage increases from $22 per hour to $28 per hour, the quantity demanded of Americano coffees increases from 3,000 to 3,450. What is the income elasticity of demand for Americano coffees?

Question

Business

Frank Dunn

15 March, 21:30

As the average hourly wage increases from $22 per hour to $28 per hour, the quantity demanded of Americano coffees increases from 3,000 to 3,450. What is the income elasticity of demand for Americano coffees?

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Answers (1)

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Atticus Delacruz · Answer 1

Answer:income elasticity of demand for Americano coffees = 0.55

Explanation:

Income Elasticitity of demand = percentage change in quantity demanded / Percentage change in income

which can easily be calculated using

Income Elasticitity of demand = (New quantity demanded - old quantity demanded / old quantity) / (New Income - Old income / old income.

new income = $28

old income=$22

new quantity = 3450

old quantity=3000

Bringing down our formulae

Income Elasticitity of demand = (New quantitry demanded - old quantity demanded / old quantity) / (New Income - Old income / old income.

= { (3450-3000) / 3000} / { (28-22) / 22} = (450/3000) / (6/22) = 0.15/0.2727=0.55

income elasticity of demand for Americano coffees = 0.55

Here, we can see that we have a positive income elasticity of demand therefore Americano coffees is a normal good as an increase in income will lead to a rise in demand. Also, the income elasticity of demand for this commodity is less than 1, therefore it is also a necessity good.