A 10 percent increase in income causes the quantity of apple juice demanded to increase from 18,800 to 21,200 gallons. The income elasticity of demand for apple juice is

A 10 percent increase in income causes the quantity of apple juice demanded to increase from 18,800 to 21,200 gallons. The income elasticity of demand for apple juice is

• A. 0.5
• B. 0.8
• C. 1.2
• D. 1.0

Answer: (D)

Income elasticity of demand tells us how much quantity demanded responds to a change in income. It’s the percent change in quantity demanded divided by the percent change in income. Here, income rises 10%. Quantity demanded goes from 18,800 to 21,200, a change of 2,400 gallons. Using the base quantity, the percent change in quantity is 2,400 / 18,800 ≈ 0.1277, about 12.8%. So the elasticity is about 12.8% / 10% ≈ 1.28. If you use the midpoint (arc) method, the percent change in quantity is 2,400 / average quantity (which is (21,200 + 18,800)/2 = 20,000), giving 2,400 / 20,000 = 0.12, and elasticity = 0.12 / 0.10 = 1.2. Therefore, the elasticity is around 1.2 (a value greater than 1, indicating a relatively responsive demand to income). Among the given options, 1.2 is the closest match.

Income elasticity of demand tells us how much quantity demanded responds to a change in income. It’s the percent change in quantity demanded divided by the percent change in income. Here, income rises 10%. Quantity demanded goes from 18,800 to 21,200, a change of 2,400 gallons. Using the base quantity, the percent change in quantity is 2,400 / 18,800 ≈ 0.1277, about 12.8%. So the elasticity is about 12.8% / 10% ≈ 1.28. If you use the midpoint (arc) method, the percent change in quantity is 2,400 / average quantity (which is (21,200 + 18,800)/2 = 20,000), giving 2,400 / 20,000 = 0.12, and elasticity = 0.12 / 0.10 = 1.2. Therefore, the elasticity is around 1.2 (a value greater than 1, indicating a relatively responsive demand to income). Among the given options, 1.2 is the closest match.