Question 5.6
1. After Chelsea’s income increased from $12,000 to $18,000 a year, her purchases of music downloads increased from 10 to 40 album downloads per year. Calculate Chelsea’s income elasticity of demand for albums using the midpoint method.
By the midpoint method, the percent increase in Chelsea’s income is
Similarly, the percent increase in her consumption of music downloads is
So Chelsea’s income elasticity of demand for albums is 120%/40% = 3.