Fred's income has just risen from $940 per week to $1,060 per week. As a result, he decides to purchase 9 percent more steak per week. The income elasticity of Fred's demand for steak is

Fred's income has just risen from $940 per week to $1,060 per week. As a result, he decides to purchase 9 percent more steak per week. The income elasticity of Fred's demand for steak is

• A. 0.75.
• B. 1.33.
• C. 0.90.
• D. 1.00.

Answer: (A)

Income elasticity of demand measures how much quantity demanded responds to a change in income. It’s calculated as the percent change in quantity demanded divided by the percent change in income. Fred’s income rises from 940 to 1060, an increase of 120 on 940, which is about 12% (often rounded to 12% for quick calculation). His steak purchases rise by 9%. So the elasticity is roughly 9% / 12% = 0.75. The positive, less-than-one elasticity means steak is a normal good that responds to income with a modest, inelastic change in quantity. If you used the exact 12.8% income increase, the elasticity would be closer to 0.70, but rounding yields the commonly expected value of about 0.75.

Income elasticity of demand measures how much quantity demanded responds to a change in income. It’s calculated as the percent change in quantity demanded divided by the percent change in income.

Fred’s income rises from 940 to 1060, an increase of 120 on 940, which is about 12% (often rounded to 12% for quick calculation). His steak purchases rise by 9%. So the elasticity is roughly 9% / 12% = 0.75. The positive, less-than-one elasticity means steak is a normal good that responds to income with a modest, inelastic change in quantity. If you used the exact 12.8% income increase, the elasticity would be closer to 0.70, but rounding yields the commonly expected value of about 0.75.