This question examines the market for chocolate bars You wil

This question examines the market for chocolate bars. You will use a demand function to identify a demand schedule, analyze the effect of changes in consumers’ incomes, calculate the income elasticity of demand, and relate the income elasticity of demand to whether chocolate bars are a normal or inferior good.

The demand for chocolate bars is given as:

Q = 20 – P + M/100

where Q is the quantity demanded of chocolate bars, P is the per-bar price of chocolate, and M is the average weekly income of consumers.

Task 1: Use the table below to find the quantity of chocolate bars demanded at each price-income combination.

Price

(per chocolate bar)

Income

Quantity of Chocolate Bars Demanded

$1.50

$    500

23.5

1.50

   1,500

33.5

1.50

   2,500

43.5

Task 2: Calculate the income elasticity of demand for chocolate bars when the consumers’ average weekly income rises from $500 to $1,500.

Task 3: Calculate the income elasticity of demand for chocolate bars when the consumers’ average weekly income rises from $1,500 to $2,500.

Task 4: Referencing the income elasticities of demand that you calculated above, explain whether you believe chocolate bars are a normal or inferior good.

Solution

Task 1 is already completed.

Task 2:
Income elasticity for chocolate = (%change in quantity)/(%change in income)

%change in quantity = (33.50 - 23.50)*100/23.50 = 42.55
%change in income = (1500 -500)*100/500 = 200
Income elasticity for chocolate = 42.55/200 = 0.21

Task 3:
Income elasticity for chocolate = (%change in quantity)/(%change in income)

%change in quantity = (43.50 - 33.50)*100/33.50 = 29.85
%change in income = (2500 -1500)*100/1500 = 66.67
Income elasticity for chocolate = 29.85/66.67 = 0.45

Task 4:

An increase in income leads to an increase in quantity demanded of chocolates and this is also reflected by an increase in the income elasticity of chocolate. Hence, chocolate bars are a normal goods.