From 1982 to 1986 retail sales of furs in the U.S rose from $0.4 billion to 1.0

Question

From 1982 to 1986 retail sales of furs in the U.S rose from $0.4 billion to 1.0 billion.After this time, there was no additional growth until 1989 when sales increased slightly to $2 billion. Subsequently there was a plunge in fur sales which dropped 40% in 1990 and 20% in 1992. In 1992 a spokesperson for the fur industry blamed the sales decline on the recession.

if the income elasticity of demand for furs is 3,how much of the decline in furs sales in 1990 can be attributed to change in consumers' income?(adjusted for inflation,total income increased 1% in 1990)explain

in 1990 the government imposed a 10% tax on furs,if price elasticity of demand for furs is 1.5,how much of the deacrease in fur sales can be attributed to this tax?(assume that the price of furs rose by 10% after the tax was imposed) explain

Explanation / Answer

Income elasticity is defined as follows :-

Income elasticity (IE) = (% change in quantity demanded) / (% change in income)

Case 1 :-

In 1990, IE =3, % change in income = +1% this means % change in quantity demanded = 3 * 1% = 3%

If IE is positive, positive change in income should lead to positive change in quantity demanded. In this case, % change in quantity demanded is negative and hence none of the change in quantity demanded can be attributable to change in consumer income. It is due to some other factors that there is a decline in quantity demanded (e.g. law changes etc.)

Case 2 :-

Assuming all income is spent on furs only. If a tax of 10% is applied, this effectively means there is a reduction of 10% in income i.e % change in income is -10%.

Hence % change in quantity demanded = 1.5 * -10% = -15%

Total quantity decrease attributable to tax is (-15%)/(-40%) = 37.5% = Answer

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