Answer
a) If Maria always spends one-third of her income on clothing, then her income elasticity of clothing demand is one, because maintaining her clothing expenditures as a constant fraction of her income means the percentage change in her quantity of clothing must equal her percentage change in income.
b) Maria's price elasticity of clothing demand is also one because every percentage point increase in the price of clothing would lead her to reduce her quantity purchased by the same percentage.
c) If Maria decides to change her spending habits and only spend one-fourth of her income on clothing her perfectly inelastic demand curve would shift to the left because she would have less to spend. Her income elasticity would remain inelastic even though the demand curve shifts and her price elasticity would remain at 0.
Work Step by Step
a) If Maria always spends one-third of her income on clothing, then her income elasticity of clothing demand is one, because maintaining her clothing expenditures as a constant fraction of her income means the percentage change in her quantity of clothing must equal her percentage change in income.
b) Maria's price elasticity of clothing demand is also one because every percentage point increase in the price of clothing would lead her to reduce her quantity purchased by the same percentage.
c) If Maria decides to change her spending habits and only spend one-fourth of her income on clothing her perfectly inelastic demand curve would shift to the left because she would have less to spend. Her income elasticity would remain inelastic even though the demand curve shifts and her price elasticity would remain at 0.
