contestada

Consider the markets for mobile and landline telephone service. Suppose that when the average income of residents of Plainville is $55,000 per year, the quantity demanded of landline telephone service is 12,500 and the quantity demanded of mobile service is 28,000. Suppose that when the price of mobile service rises from $100 to $120 per month, the quantity demanded of landline service increases to 11,000. Suppose also that when the average income decreases to $50,000, the quantity demanded of mobile service decreases to 26,000. What is the income elasticity of demand for mobile service? Show calculation and interpret the result.

Respuesta :

Answer: Income elasticity of demand for mobile services = 1.885

Explanation:

Given :

Income 1 = $55000

Income 2 = $60000

Demand 1 = 28000

Demand 2 = 33000

Formula for income elasticity as per mid point method is as follow:

[tex]\left ( \Delta \left ( Quantity demanded/2 \right )\div \Delta \left ( Income/2\right ) \right )\\[/tex]

i.e. [tex]\left ( (33000-28000)/(33000 + 28000)/2 \right )\div\left ( (60000-55000)/(60000+55000)/2\right ) \right )[/tex]

= 1.885

Since income elasticity of demand is positive and greater than 1 therefore mobile service is considered as a superior goods.