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Own​ price, Px​ = ​$30 Price of a related​ good, Py​ = ​$4 Quantity demanded​ = 24.75 Price of a related​ good, Pz​ = ​$275 Consumer​ income, Y​ = ​$20 comma 000 The income elasticity of demand ​'xi​', when equilibrium quantity is 24.75 units and income is ​$20 comma 000​, is equal to . 808 ​(enter your response rounded to three decimal places​). In this case the good​ is:

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Answer:

Explanation:

Given the following ;

  • Px​ = ​$30, Py​ = ​$4, Quantity demanded​ = 24.75 , Pz​ = ​$275 , Y​ = ​$20
  • I = $20,000, Q = 24.75 units

  • From the equation ; Q=9-0.1Px-Py+0.01Pz+0.001Y

  • differentiate Q wrt Y; dQ/dY = 0.001
  • And from Income elasticity of demand = (dQ/dY) x (I/Q)
  • = 0.001 x 20,000/24.75
  • = 0.80

from the calculation of the income elasticity of demand which is less than 1, hence the good is a NECESSITY and not a Luxury.

If IED > 1 ; Goods is Luxury

if IED < 1 ; Goods is necessity

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