00:01
Hello, let me put these numbers to the table for simplicity.
00:08
So when income is 10 ,000, quantity demanded would be 50, when income is 20 ,000, when income is 20 ,000, quantity demanded is 60, when it's 30 ,000, it's 70 ,000, it's 70, when it's 40 ,000, it's 70, when it's 40 ,000, it's 70, it's 80 and finally when it's 50 ,000 it will be 90 and now we can start answering the questions so let's start with part a let's calculate income elasticity of demand if income increases from 10 ,000 to 20 ,000 so let's use the midpoint formula if there is a increase in income from 10 ,000 to 20 quantity demanded will be 60 minus the old quantity which is 50 and we divide this by the midpoint the number which is the average of 60 and 50 or the number which is exactly in between these two numbers in the middle of this interval and the same for income 20 ,000 minus 10 ,000 again divided by the midpoint.
01:49
This is the midpoint, 15, and if we calculate we'll find that price, sorry, income elasticity of demand is 0 .27 and 3.
02:08
Let's look through the part b.
02:10
In part b we have an increase from $40 ,000 to $50 ,000.
02:19
Quantediment will be 90 minus 80 divided by midpoint which is 85 and we divide this by the change in income.
02:33
50 minus 40 again divided by the midpoint which is 45.
02:38
And income elasticity of demand in this case will be 0 .531 and now we can go to the part b this is not part b the second part of part a and when part b in this part we have a question is this normal or an inferior or luxury good and the question is it normal good because income elasticity of demand is positive it's greater than zero and also it's less than one if it's negative if it's less than zero it will be an inferior good and if income elasticity of demand is greater than one this good is a lot luxury good.
03:49
But for this good, income and assist of demand is between 0 and 1.
03:57
So this is a normal good.
04:00
And finally, does the proportion of household income spend on this good increase or decrease as income increases? so let's just look to three cases...