If Starbuckss marketing department estimates the income elas

If Starbucks’s marketing department estimates the income elasticity of demand for its coffee to be 1.8, how will the prospect of an economic boom (expected to increase consumers’ incomes by 6 percent over the next year) impact the quantity of coffee Starbucks expects to sell?

Instruction: Round your response to 2 decimal places.

It will change by __ percent.

Solution

The income elasticity of demand measures the responsivness of the quanity demanded to the percentage change in the price.

Lets denote the income elasticity as e,

e=% change in quantity demanded/% change in income

Given, e=1.8, expected increase in income is 6 %

1.8=% change in quantity demanded/6

% change in quantity demanded=10.8

It will change by 10.8 percent.