Suppose you believe that the income elasticity of demand for state government se

Question

Suppose you believe that the income elasticity of demand for state government services (measured by expenditures) is 0.80. If state per-capita income is expected to increase by 20% over the next three years, what is the expected effect on desired state spending? If the increase in income was only economic changed expected in these years (no inflation, population growth, or change in consumer preferences), what might you expect to happen to state spending as a percentage of state personal income ?

Explanation / Answer

Ans

Desired ired state spending rises

There will be then one to one relationship.Desired spending rises by 20(0.80)=16%.Anyway state spending is expected to rise

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