The income elasticity of demand for automobiles in the United States was estimated by a government agency to be between 2.5 and 3.9.

a) What does this mean?

b) If incomes rise by 10 percent, what happens to the purchase of automobiles?

a)

Income elasticity is the percentage change in quantity demanded divided by the percentage change in income.

If the income elasticity is between 2.1 and 3.92.1 and 3.9 it means that for every percentage change in income the percentage change in the quantity demanded of automobiles increases between 2.1% and 3.9%2.1% and 3.9%.

b)

If incomes rise by 20%20% we would expect the number of automobiles purchased to increase 21% to 39%21% to 39%.