Question

An individual's income rises from $\backslash (80,000$per year to $\backslash )84,000$per year, and as a consequence the person's purchases of movie downloads rise from $48$per year to $72$per year. What is this individual's income elasticity of demand? Are movie downloads a normal or inferior good? (Hint: You may want to refer to the discussion of normal and inferior goods in Chapter 3.)

Short answer

Digitalmovie downloads are a general benefit as demand increases as income increases. They have a very resilient demand, with a$10\%$increase in income and an $82\%$increase in movie downloads.

Step-by-step solution

Step 1- Given information (part a)

There are several determinants of the demand for goods. Demand for goodsdepends on other factors such as consumer income, prices of related goods, preferences and preferences, as well as their own prices. Most products are directly related to consumer income.

As your income increases, so does the amount required. However, this information provides the concept of income elasticity of demand, how much the amount increases with certain changes in consumer income.

Step 2- Given explanation (part a)

Income elasticity of demand measures the change in demand for a good in response to a particular change in a consumer's income. Other conditions are the same. The income elasticity of demand can be measured by the following formula.

Income elasticity of demand$\left(E_i\right)=\frac{\text{proportionate change in quantity demanded}}{\text{proportionate change in income}}$

Proportionate change in qty demanded$=\frac{\text{change in qty demanded}}{\text{average of the sum of original and new quantities}}$

$=\frac{\Delta Q}{\left(Q_1+Q_2\right)/2}$

$\Delta Q=$New quantity $-$Original quantity

$Q_1=$Original quantity

$Q_2=$New Quantity

- Given information (part b)

$\text{Proportionate change in income}=\frac{\text{change in income}}{\text{average of the sum of original and new incomes}}$

$=\frac{\Delta Y}{\left(Y_1+Y_2\right)/2}$

$∆Y=$New Income-Original Income

$Y_{2=}$Original Income

$Y_{2=}$New Income

Step 4- Given information (part b)

$Ei=\frac{\Delta Q}{\left(Q_1+Q_2\right)/2}÷\frac{\Delta Y}{\left(Y_1+Y_2\right)/2}$

In the case of movie downloads:

$Y_1=\$80,000$per year

$Y_2=\$84,000$per year

Step 5- Given detail (part a)

$\Delta Y=\$84,000-\$80,000$

$=S4,000$

$Q_1=4$per month

$=4\times 12\text{months}$

$=48$per year

$Q_2=6$per month

$=6\times 12$months

$=72$per year

$\Delta Q=72-48$

$=24$

Step 6- Given detail (part b)

Substitute the values in the equation

$Ei=\frac{24}{(48+72)/2}÷\frac{4,000}{(80,000+84,000)/2}$

$=\frac{24}{60}÷\frac{4,000}{82,000}$$=0.4÷.048$$=8.2$

The income elasticity of demand for digital movie downloads is $8.2$, so the elasticity is $>1$. If your income changes by $10\%$, your demand can change by $82\%.$

step 7- Conclusion

Ordinary goods are goods with a demand of that is directly related to consumer income.

As income levels rise, their demand should increase.

Indirect relationship with their price. Demand should go down as prices go up