If the income elasticity of demand for Good X is 2, a rise in all consumers’ disposable incomes from £50 million to £52 million will increase the quantity demanded of Good X by: A 2%. B 4%. C 6%. D 8%. May I know why the answer given is 8% since i could just use 2*2 to get 4 which is the quantity demanded ?
In the circular flow of income model: A savings, taxes and investment are withdrawals. B savings, imports and taxes are withdrawals. C investment, government expenditure and imports are injections. D investment, exports and consumption are injections. May I know if D is correct for this question as the answer given is B.
Income elasticity of demand is equal to % change in QD/% change income. So, here IED is 2, and % change in income is (52-50)/50, i.e. 0.04. Thus, 0.04*2 = % change in quantity demanded. So, % change in QD = 0.08, or 8%.
D would be correct, if consumption was not a part of the option. Consumptions are not injections. Govt spending is a part of injections.
