Question

Blake eats two bags of generic potato chips each day, and does not purchase any name-brand chips. Blake's hourly wage increases from $8 to $15 , and he decides to eat one name-brand bag and one generic-brand bag each day. Calculate Blake's income elasticity of demand for generic potato chips.

Answer 1

Answer:

Elasticity = 1,08

Explanation:

Elasticity is a microeconomic concept that aims to measure the sensitivity of demand in the face of income changes. To calculate the  elasticity of income, a formula is used that divides the observed change in quantity (Q) by the change in price of income (P). Elasticity = [▲ Q /Q]/ [▲ P

/P]

At first, Blake consumed 2 generic potatoes and his income was $ 8. After raising the income to $ 15, he decreased the amount of generic potatoes by one.

So, we have:

E = [(2-1)/1] / [(15-8)/15)]

E = 0.5/ 0,46 = 1,08

Plus: When elasticity is greater than 1, we say that the demand for generic potatoes is elastic relative to income, ie, increasing income decreases the amount of generic potatoes and decreasing income increases the demand for generic potatoes. Therefore, Blake's demand for generic potatoes is elastic relative to his income variation.

If the result were less than 1, the demand for potatoes would be considered inelastic (not sensitive to changes in income).