How is the income elasticity of demand defined?
AThe percentage change in quantity demanded divided by the percentage change in price
BThe dollar change in income divided by the dollar change in quantity demanded
CThe percentage change in quantity demanded divided by the percentage change in income
DThe percentage change in income divided by the percentage change in quantity demanded
Answer & Solution
Correct answer: C. The percentage change in quantity demanded divided by the percentage change in income
1. Income elasticity of demand measures how responsive quantity demanded is to a change in income rather than price.
2. It equals the percentage change in quantity demanded divided by the percentage change in income.
3. Reversing the ratio, as in option D, would not measure demand's responsiveness to income.
4. Option A instead describes the ordinary price elasticity of demand, a different concept.
_Source: OpenStax Principles of Microeconomics for AP Courses (CC BY 4.0), Ch 5 "Elasticity", section 5.4 | Elasticity in Areas Other Than Price_
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