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2015 April Past Year

R

Robert

Very Active Member
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.
 
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