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For each scenario, calculate the income elasticity of demand, determine whether the good is inferior or normal, and classify the good's income elasticity. When calculating the income elasticity of demand, use the midpoint formula. Round your answers to the nearest hundredth.

Sylvia's annual salary increases from $102,750 to $109,500, and she decides to increase the number of vacations she takes per year from three to four. Calculate her income elasticity of demand for vacations.

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Answer:

Sylva's income elasticity of demand for vacations is 4.83

Explanation:

Income elasticity of demand = (change in the number of vacations per year/average vacations per year) ÷ (change in annual salary/average annual salary)

change in vacations = 4 - 3 = 1

average vacations = (4+3)/2 = 3.5

change in annual salary = 109,500 - 102,750 = 6,750

average annual salary = (109,500 + 102,750)/2 = 106,125

Income elasticity of demand = (1/3.5) ÷ (6,750/106,125) = 0.29 ÷ 0.06 = 4.83

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