Question 4 Taz, has seen his hours at work increased. He used to work 30 hours a

Question

Question 4 Taz, has seen his hours at work increased. He used to work 30 hours a week at $30 and hour, but now he works 40 hours. Due to this change he noticed he purchased more sport coats; up from 1 coats week to 2. He also reduced his number of polo shirts from 4 to 2. Income went from $30 x 30hrs $900 a week to $30 x 40 or $1200 i) What is the income elasticity of polo shirts for Taz? ii) What type of good are polo shirts for Taz? iii) What is the income elasticity of sport coats for Taz? iv) What type of good is sport coats for Taz?

Explanation / Answer

Income elasticity of demand tells us how the demand for a good changes due to change in income, other things remaining the same

Income elasticity of demand=

% change in quantity demanded/% change in consumers income

1)

% change in income=( $1200-$900)/$900=300/900= 33.33%

% change in quantity demanded for polo shirts= (2-4)/4=-2/4=-50%

Income elasticity of demand for polo shirts=- 50%/33.33%= -1.5

2) Since income elasticity of demand for polo shirts is negative, it is an inferior good.

If quantity demanded decreases when income increases, the good is an inferior good.

3)

% change in income=( $1200-$900)/$900=300/900= 33.33%

% change in quantity demanded for sports coat= (2-1)/1= 1/2=100%/33.33%= 3

Income elasticity of demand for sports coats= 3.

4) Since the income elasticity of demand is positive, sports coats are a normal good. If income goes up, then the demand for sports coats will go up.

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