Jerry spends his entire income on two goods Bran and Tea Eve

Jerry spends his entire income on two goods, Bran and Tea. Every month he spends half of his income on each of these goods. Jerry\'s income elasticity of demand for Bran is 0.9. What is the income elasticity of demand for Tea?

Solution

The sum of the weighted average of the income elasticities of demand of all goods must add up to 1. Thus all goods cannot be inferior. In this case we have thus (1/2*0.9) + (1/2*X) =1. Where X is the income elasticity of demand of Tea. Given this we have the income elasticity of demand of tea as 1.1.