When Mohesha receives an increase in her pay check from​ $1,800 a month to​ $2,200 a​ month, she increases the quantity of hot chocolate that she buys from 19 cups a month to 21 cups a month. ​Mohesha's demand for hot chocolate is income​ ______. For​ Mohesha, hot chocolate is​ ______ good.

Business · High School · Thu Feb 04 2021

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 To determine whether Mohesha's demand for hot chocolate is income elastic, income inelastic, or unitary elastic, we look at how her consumption of hot chocolate changes in response to changes in her income. The concept we are interested in here is called "income elasticity of demand."

The formula for income elasticity of demand (Ey) is:

Ey = (% Change in Quantity Demanded) / (% Change in Income)

First, let's find the percentage change in Mohesha's income. Her income increased from $1,800 to $2,200. The change in income is:

$2,200 - $1,800 = $400

The percentage change in income is:

($400 / $1,800) * 100 = 22.22%

Next, let's find the percentage change in the quantity of hot chocolate demanded. She increased her consumption from 19 cups to 21 cups. The change in quantity demanded is:

21 cups - 19 cups = 2 cups

The percentage change in quantity demanded is:

(2 cups / 19 cups) * 100 = 10.53%

Now we can calculate the income elasticity of demand:

Ey = (10.53%) / (22.22%) = approximately 0.47

An income elasticity of demand less than 1 indicates that the good is a necessity or is income inelastic. In other words, as income increases, the quantity demanded for the good increases, but not by as much as the increase in income.

For Mohesha, hot chocolate is an income inelastic good because her consumption rises with increased income, but not proportionately. This means that hot chocolate is likely a necessity for Mohesha rather than a luxury.

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