question archive The firm that you work for has calculated the income elasticity for your product to be -0
The firm that you work for has calculated the income elasticity for your product to be -0
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The firm that you work for has calculated the income elasticity for your product to be -0.2. If income rises by 20%, you can expect your sales to increase by 40%. Is this true or false? Explain.
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The statement is false.
An income elasticity of demand of -0.2 implies that for one percent change in income, quantity demanded will change by -0.2%. If income rises by 20%, then the quantity demanded will change by 20*(-0.2%) = -4%, i.e., decline by 4%. Assuming price does not change, then sales (in dollars) will also decline by 40%.
