Suppose that as my income allocated to sweets increases from

Suppose that as my income allocated to sweets increases from $100 to $250: my consumption of ice cream falls from 20 ice cream cones to 5 ice cream cones. What is my income elasticity of demand for ice cream cones at the price of $250? Are ice cream cones inferior goods, necessities, or luxuries?

Solution

a.)Income elasticity of demand=% change in quantity demanded / % change in income

% change in income=[(250-100)/100](100)=150%

% change in quantity demanded=[(5-20)/20](100)= -75%

Income elasticity of demand= -75/150= -0.5

b.) Inferior goods have a negative income elasticity of demand - the quantity demanded for inferior goods falls as incomes rise.

So ice cream is an inferior good.