Question

Blake eats two bags of generic potato chips each day, and does not purchase any name-brand chips. Blake's hourly wage increases from $ 8 to $ 15 , and he decides to eat one name-brand bag and one generic-brand bag each day. Calculate Blake's income elasticity of demand for generic potato chips. Vacations are a(n) normal good. As a good, vacations are income-elastic. Generic potato chips are a(n) inferior good. As a good, generic potato chips are neither income-elastic nor income-inelastic.

Answer 1

Answer:

-1.10; Generic potato chips are a(n) inferior good.

Explanation:

Initial income = $8

New income = $15

Initial demand = 2

New demand = 1

Average income:

= (Initial income + New income) ÷ 2

= ($8 + $15) ÷ 2

= $11.5

Change in income:

= (New income - Initial income) ÷ Average income

= ($15 - $8) ÷ $11.5

= 0.61

Average quantity demanded:

= (Initial demand + New demand) ÷ 2

= (2 + 1) ÷ 2

= 1.5

Change in Quantity demanded:

= (New demand - Initial demand) ÷ Average Quantity demanded

= (1 - 2) ÷ 1.5

= -0.67

Blake's income elasticity of demand for generic potato chips:

= Change in Quantity demanded ÷ Change in income

= -0.67 ÷ 0.61

= -1.10

Therefore, the demand for generic potato chips is negative income elastic.

Hence, the Generic potato chips are an inferior good.