Question

Suppose Nationwide increases the insurance premium they charge for their auto policies by 16 percent. In​ response, the demand for State Farm auto policies in a small town increases from 3 comma 500 to 4 comma 025. What is the​ cross-price elasticity of demand for State Farm auto policies in this​ town?

Answer 1

CPE= 15%/16%= 0,9375

Step-by-step explanation:

The cross-price elasticity measures how the quantity demanded of good A changes when the price of good B changes by 1%.

The cross-price elasticity (CPE) formula is:

CPE= Δ%q of good A/ Δ%p of good B

good A: state farm auto policies

good B: insurance premium for auto policies

- Percentage change in the quantity demanded for good A:

%Change in quantity demanded= (q2-q1/q1)*100 = (4,025-3,500)/3,500= 0,15*100= 15%

- Percentage change in the price for good B: 16%

-CPE= 15%/16%= 0,9375