If income rises from N2000 to N4000 and quantity demanded increase from 80 units to 120 units; find the income elasticity of demand?

A. 0.5
B. 1.2
C. 2.5
D. 4.0

Correct Answer:

Option A = 0.5

Explanation

Income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income.

percent change in quantity demanded = 120 – 80 = 40
40/80 = 0.5

percent change in income = 4000 – 2000 = 2000
2000/2000 = 1

Income elasticity of demand = 0.5/1 = 0.5