Multiple choice

If consumers always spend 15% of their income on food, then the income elasticity of demand for food is

  1. 1.50

  2. 1.15

  3. 1.00

  4. 0.15
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

If consumers ALWAYS spend 15% of income on food (constant budget share), income elasticity = 1. This means food demand grows exactly proportionally with income. When income doubles from 1000 to 2000, food expenditure doubles from 150 to 300 (still 15%). Income elasticity = (%ΔQ/%ΔI) = 100%/100% = 1. This is a special case of unitary income elasticity.

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