• Kevin's income elasticity for good A is equal to -1.5.
• His current income is $40,000.
• he buys 200 units of good An annually.
• His income falls to $36,000.

   The question asks us to determine how many units of good A Kevin will purchase. We know that = -1.5 or %Q = -1.5 x %I. Since income elasticity is negative the good is inferior for Kevin and his consumption will change opposite an income change. His income drops from $40,000 to $36,000, a drop of 10% using our simple formula. This means that his consumption must increase by 15% since %Q = -1.5 x %I. Thus, his new consumption will be his old consumption multiplied by 1.15 (a 15% increase) or 200 x 1.15 = 230.

18. Kevin's income elasticity for good A is equal to -1.5. His current income is $40,000 per year and he buys 200 units of good A annually. If his income falls to $36,000 how many units of good A will he purchase?

1. 230. Correct, as shown above.
2. 170. The good would have to be normal with a positive income elasticity for this to be correct, a drop in consumption due to a drop in income.
3. 150.The good would have to be normal with a positive income elasticity for this to be correct, a drop in consumption due to a drop in income.
4. 125.The good would have to be normal with a positive income elasticity for this to be correct, a drop in consumption due to a drop in income.
5. 250.This is at least an increase such as we would have from an inferior good when income drops, but it is too large an increase.