4. If Cassandra bought 16 cotton blouses last year when her income was $40,000 and she buys 24 cotton blouses this year when her income is $50,000, then what is her income elasticity of demand? Interpret what the income elasticity of demand you just calculated means to you. Also, are cotton blouses normal goods or inferior goods? Why? Will the demand curve shift rightward or leftward if cotton blouses are normal goods or inferior goods? Are cotton blouses income elastic, income inelastic or unit elastic? Why?

Answer 1

Income elasticity of demand = (24-16)/(50,000-40,000) = 0.4

The income elasticity of demand of 0.4 means that Cassandra's demand for cotton blouses increases by 0.4 for every 1% increase in her income.

Cotton blouses are normal goods, as an increase in income leads to an increase in demand for them. The demand curve will shift rightward if cotton blouses are normal goods.

Cotton blouses are income elastic, as an increase in income leads to an increase in demand for them.