Question

Let qa be the quantity demanded of good a, pa be the price of good a, pb be the price of good b, and m be income. let the demand equation be qa=86-5pa-4pb+2m. if we know that pa=6, pb=3, and m=30, then the approximate value of the cross-price elasticity of demand is:

Answer 1

Answer: Cross price elasticity is - 0.12

Step-by-step explanation:

Cross price elasticity measures the responsiveness of quantity demanded of good a to a change in any of its related variable such as good b.

`Qa=86-5Pa-4Pb+2M`

Given,

Pa=6, Pb=3, and M=30,

`Qa = 86 - 5(6) - 4(3) + 2(30)`

`Qa = 86 - 30 - 12 + 60`

`Qa=104`

So, cross price elasticity is given by

`e_(pb) = (Change in Qa)/(Change in Pb) * (Pb)/(Qa)`

`e_(pb) = -4 * (3)/(104)`

`e_(pb) = -0.1153`

Since, cross price elasticity is negative it means that good a and good b are complements to each other.