Calculate Income Elasticity of Demand for Ketchup

Explanation:

Income elasticity of demand measures the responsiveness of quantity demanded to changes in income. It shows how the demand for a product changes in response to a change in income levels. In this case, we are looking at the income elasticity of demand for ketchup.

If the absolute value of income elasticity of demand is:

  • Greater than one, it means demand is elastic.
  • Less than one, it means demand is inelastic.

To calculate the income elasticity of demand, we use the formula:

Income elasticity of demand = percentage change in quantity demanded / percentage change in income

Given that the quantity of ketchup demanded increases by 5% when income rises by 12%, we can calculate the income elasticity of demand as follows:

Income elasticity of demand = 5/12 = 0.42

Therefore, the income elasticity of demand for ketchup is 0.42, indicating that the demand for ketchup is relatively inelastic in response to changes in income.

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