Answer in Microeconomics for sam #160676
If people always spend 25 per cent of their incomes on housing, then the income elasticity of demand for housing is
The income elasticity of demand for housing is inelastic
Income elasticity of demand is the responsiveness of quantity demanded to changes in disposable income. Quantity of housing consumed is fixed at 25% of income. Because of this, the percentage change in quantity of housing consumed is always less than percentage change in income. As an example, when income increases by 50%, quantity of housing consumed increases by 12.5%(50% × 0.25); when income increases by 75%, quantity of housing consumed increases by 18.75% (75% × 0.25), and so on. In each case, percentage change in income exceeds percentage in quantity of housing consumed; hence, income elasticity of demand is inelastic.