The government of Vietnam is forecasting economic growth of 6% next year. An economic research institute has calculated that the income elasticity of demand for domestic air travel is +1.5. By what percentage is demand for domestic air travel expected to change?

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Question

The government of Vietnam is forecasting economic growth of 6% next year. An economic research institute has calculated that the income elasticity of demand for domestic air travel is +1.5. By what percentage is demand for domestic air travel expected to change?

Accepted Answer

Increase by 9% — Award 1 mark for correct calculation: % change in demand = YED × % change in income = 1.5 × 6% = 9%. Demand will increase because YED is positive. A is incorrect — this divides 6 by 1.5. B is incorrect — this adds the values. D is incorrect — demand increases, not decreases, when YED is positive and income rises.

Answer

Increase by 9%

Answer

Decrease by 9%

Answer

Increase by 7.5%

Answer

Increase by 4%

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