 # Income Elasticity Question

Assume that Rajesh Singh’s income increased from \$20,000 per year to \$30,000 per year, and his demand for “store-brand” bread decreased from 80 loaves to 40 loaves per year. Which of the following most accurately describes Singh’s income elasticity for store-brand bread? A.)Income elasticity is +1.0 and store-brand bread is a complimentary good. B.)Income elasticity is -0.6 and store-brand bread is an inferior good. C.)Income elasticity is -0.15 and store-brand bread is an inferior good. D.)Income elasticity is +0.6 and store-brand bread is a normal good. Q-Bank says B is correct. Here is what I came up with: 40 / 60 = .6667 10,000 / 25,000 = .40 .6667 (% change in quantity demanded) / .40 (% change in income) = 1.6667 Please help.

where did you get the 60 in 40/60?

Took the average of the 80 and 40… (80 + 40) / 2 = 60

IED = % Change in Demand / % Change in Income % Change in Demand = (40 - 80) / (40+80)/2 = -40 / 60 = 0.6666 % Change in Income = (30K - 20K) / (30K + 20K)/2 = 10K / 25K = 0.4000 IED = 0.66666/0.4000 IED = 1.66667 even I get the same apcarlso, probably a typo at their end? But the good is surely a inferior good, as the income increased and people moved towards a better quality bread and the demand of this ‘store-brand’ decreased. - Dinesh S

Dinesh - Thanks for restoring my sanity. If we fail the econ portion of the exam, I say we organize a class-action lawsuit against Schweser for the faulty Q-Bank. Punitive damages are a real biatch.

yeah income elasticity should be (-) 1.667 and the bread is an inferior good

i doubled checked what I knew. the problem is that if you are not 100% sure on what was learned this questions can bring you down. chadtap you have to take in account % change relative to the average in the calculations

I also reached -1,667 elasticity in demand

The 2s cancel out when you’re doing the IED formula (30-20 ) / (30+20) = 1/5 = 10/50 (40-80) / (40+80) = -1/3 = -40/120 1/5 / -1/3 = -3/5 = -.6

bluefinancier Isn’t it change in quantity by change in income you should measure? why are you doing change in income by change in quantity??? therefore the right answer should be -1/.6 = -1.6667… which is what every one else has.

what was the question id on this one? Does any one have it?

D’oh! Yeah, nevermind. cpk123’s right (30-20 ) / (30+20) = 1/5 = 10/50 (40-80) / (40+80) = -1/3 = -40/120 -1/3 / 1/5 = -1.67

% Change in Demand = (40 - 80) / (40+80)/2 = -40 / 60 = -0.6666 % Change in Income = (30K - 20K) / (30K + 20K)/2 = 10K / 25K = 0.4000 Correct Elasticity = -0.6666/0.4 = -1.66 Incorrect Elasticity = -0.4/0.6666 = -0.6 (denominator and numenator are swaped)