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How does total expenditure change given percent increases in income? example please help!?
Assume that the income elasticities for soft drinks and beer are .5 and .8 respectively.
(a) How much would total expenditures on soft drinks change as a result of a 10 percent increase in income assuming no change in the prices of soft drinks or beer?
(b) How would a 10 percent increase in income be expected to affect total expenditures on beer, assuming no change in the prices of soft drinks or beer?
(c) Given your answer to part (b), would you expect the typical household with $40,000 annual income to have a larger or smaller share of their total expenditures allocated to beer compared to the typical household with $60,000 annual income?
Explain the logic underlying you answer
1 Answer
- Anonymous3 years ago
a the quantity demanded will increase=10x0.5=5%. So expenditure will change= 5%