When income increases from $9,400 to $10,600, JMU graduate students purchase 490 pizzas per week instead of 510. What is the income elasticity for pizza? If necessary, round your answer to the nearest tenth and include leading zeros in a decimal. (That is, if you find an answer of 0.932, type “0.9”).
Income elasticity measures how the quantity demanded for a particular good changes in response to changes in income. In economic terms, it helps us understand whether a product is a normal good (demand increases with income) or an inferior good (demand decreases with income). In this scenario, we will explore the income elasticity for pizza among graduate students at James Madison University (JMU) as their income increases from $9,400 to $10,600 annually.
Income Elasticity of Demand (YED) is calculated using the following formula:
YED = (% Change in Quantity Demanded) / (% Change in Income)
To find the income elasticity for pizza in this case, we first need to calculate the percentage change in the quantity of pizzas demanded and the percentage change in income.
Initial quantity demanded (Q1) = 510 pizzas per week New quantity demanded (Q2) = 490 pizzas per week
Percentage change in quantity demanded = [(Q2 – Q1) / Q1] x 100 = [(490 – 510) / 510] x 100 = (-20 / 510) x 100 = -3.92%
Initial income (I1) = $9,400 New income (I2) = $10,600
Percentage change in income = [(I2 – I1) / I1] x 100 = [($10,600 – $9,400) / $9,400] x 100 = ($1,200 / $9,400) x 100 ≈ 12.77%
Now that we have both the percentage change in quantity demanded (-3.92%) and the percentage change in income (12.77%), we can calculate the income elasticity of pizza.
YED = (% Change in Quantity Demanded) / (% Change in Income) YED = (-3.92%) / (12.77%) YED ≈ -0.307 (rounded to the nearest tenth with a leading zero)
The income elasticity of pizza for JMU graduate students is approximately -0.3. Since the income elasticity is negative, this suggests that pizza is an inferior good for these students. In other words, as their income increases, they tend to buy fewer pizzas. This could be due to students having more diverse dining options or healthier eating habits as their income rises.
Understanding income elasticity is essential for businesses and policymakers to anticipate how changes in income levels will affect the demand for specific goods and services. In this case, we found that the income elasticity for pizza among JMU graduate students is -0.3, indicating that pizza is an inferior good for this particular group. This information can be valuable for pizzerias and university food services in planning their marketing strategies and product offerings to meet the changing preferences of their customers.
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