Income Elasticity and Quantity Demanded

Income elasticity of demand measures the responsiveness of the quantity demanded of a good or service to a change in income. It helps to determine whether a good is a normal good, an inferior good, or a luxury good.

Formula for Income Elasticity of Demand
The formula for income elasticity of demand is as follows:
Income Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Income)

Given Information
The income elasticity is stated as 5.5%, which means that a 1% increase in income leads to a 5.5% increase in quantity demanded. Additionally, it is given that there is a 3% increase in average income.

Calculating the Increase in Quantity Demanded
To find the increase in quantity demanded, we can use the income elasticity formula and the given information.

Income Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Income)

Substituting the given values:
5.5% = (% Change in Quantity Demanded) / 3%

Now, we can solve for the % Change in Quantity Demanded:
% Change in Quantity Demanded = 5.5% * 3%

Calculating the Actual Increase in Quantity Demanded
To calculate the actual increase in quantity demanded, we need to know the original quantity demanded. Let's assume the original quantity demanded is 100 units.

Actual Increase in Quantity Demanded = % Change in Quantity Demanded * Original Quantity Demanded
= (5.5% * 3%) * 100

Explanation
A 3% increase in average income will lead to an increase in quantity demanded. The income elasticity of 5.5% indicates that the good is income elastic, meaning that it is a luxury good. As income increases, the demand for luxury goods also increases at a faster rate.

This implies that for every 1% increase in income, the quantity demanded increases by 5.5%. In this case, with a 3% increase in average income, the quantity demanded will increase by (5.5% * 3%) = 16.5%.

Therefore, the increase in quantity demanded will be 16.5% of the original quantity demanded. This means that if the original quantity demanded was 100 units, the actual increase in quantity demanded would be (16.5% * 100) = 16.5 units.

Conclusion
In conclusion, a 3% increase in average income will lead to an increase in quantity demanded. The income elasticity of 5.5% indicates that the quantity demanded will increase by 16.5% of the original quantity demanded. This demonstrates the income elasticity of demand and the responsiveness of consumers to changes in income.