Question : If the number of goods demanded increases from 4000 to 6000 when the average income of the population increases from Rs. 26000 to Rs. 30000, find the Arc Income Elasticity of Demand.
Option 1: 0.5
Option 2: 2
Option 3: 1.4
Option 4: 2.8
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Correct Answer: 2.8
Solution : The correct option is 2.8 .
Arc elasticity is the elasticity of one variable concerning another between two given points.
Arc Income Elasticity of Demand = [(Q2 - Q1)/((Q1 + Q2)/2)]/[(Y2 - Y1)/((Y1 + Y2)/2)]
Where: Q1 = Initial quantity demanded (4000), Q2 = Final quantity demanded (6000) Y1 = Initial average income (Rs. 26,000) Y2 = Final average income (Rs. 30,000)
Income Elasticity of Demand = [(6000 - 4000)/((4000 + 6000)/2)]/[(30000 - 26000)/((26000 + 30000)/2)]
Income Elasticity of Demand = 2.8
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