Question 1:
(a) Suppose the income elasticity of demand for furniture is 3 and the income elasticity for doctors' services is 0.3. Compare the impact on furniture and doctors services of a recession that reduced consumer incomes by 10 per cent. (2 marks)
Change in income = 10% = 0.1
Income elasticity of demand = change in quantity demanded/ change in income
Therefore: change in quantity demanded = Income elasticity of demand × change in income
Impact of recession on furniture:
Change in quantity demanded = 3 × 0.1= 0.3 = 30%
A change of 10% in consumer income will result in a 30% change in quantity demanded of furniture.
Impact of ...