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Adella always spends 30% of her income on gizmos
Adella always spends 30% of her income on gizmos. Assume that her income increases by some percentage while the price of gizmos remains constant (and that all gizmos cost the same). What is her income elasticity of demand for gizmos?
Expert Solution
Recall that income elasticity = percentage change in quantity demanded / percentage change in income.
In this case, income increases by some percent, say, A percent. Since Adella always spends 30% of her income on gizmos, her total expenditure on gizmos must also increase by A percent. We are also told that price of gizmos is constant, so the quantity of gizmos Adella buy must increase by A percent. Applying the formula, income elasticity = A / A = 1.
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