Assume that a 6 percent increase in income in the economy pr

Assume that a 6 percent increase in income in the economy produces a 3 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is

Solution

Income elasticity of demand indicates us the percentage change in quantity demanded for each 1 percent change in the income of the consumer. Here the income of the consumer increases by 6 percent. Hence, as a result the quantity demanded rises by 3 percent for good X. This makes the coefficient of income elasticity of demand equal to

em = % change in QD/% change in M = 3%/6% = 0.5

Hence, coefficient of income elasticity of demand is 0.5 and is positive reflecting that good X is a normal good.