A 10 percent decrease in income decreases the quantity demanded of compact discs by 3 percent. The income elasticity of demand for compact discs is

A 10 percent decrease in income decreases the quantity demanded of compact discs by 3 percent. The income elasticity of demand for compact discs is

• A. 10.0.
• B. 3.3.
• C. -0.3.
• D. 0.3.

Answer: (D)

Income elasticity of demand measures how much quantity demanded responds to a change in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income (E = %ΔQ / %ΔI). Here, income falls by 10% and quantity demanded falls by 3%. So E = (-3%) / (-10%) = 0.3. The same direction of the changes makes the elasticity positive, meaning compact discs are a normal good. The magnitude 0.3 < 1 indicates the demand is relatively inelastic with respect to income, so quantity changes only modestly as income changes.

Income elasticity of demand measures how much quantity demanded responds to a change in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income (E = %ΔQ / %ΔI).

Here, income falls by 10% and quantity demanded falls by 3%. So E = (-3%) / (-10%) = 0.3. The same direction of the changes makes the elasticity positive, meaning compact discs are a normal good. The magnitude 0.3 < 1 indicates the demand is relatively inelastic with respect to income, so quantity changes only modestly as income changes.