Question

Suppose an 18 percent drop in the price of strawberries leads to a 24 percent increase in the quantity demanded of strawberries and a 12 percent decrease in the quantity demanded of plums.

a. What is the price elasticity of demand for strawberries? ___
b. At the current price level, the demand for strawberries is ____ because the price elasticity of demand for strawberries is ____
C. What is the cross-price elasticity of demand between strawberries and plums? ?_____
d. Strawberries and plums are ___ because the cross-price elasticity of demand is ?____

Answer 1

The price elasticity of demand for strawberries is 1.33, indicating elastic demand. The cross-price elasticity of demand between strawberries and plums is 0.67, suggesting that they are substitutes. This means that a price change in one affects the demand for the other.

Step-by-step explanation:

Understanding Price Elasticity of Demand for Strawberries

The price elasticity of demand for strawberries can be calculated using the formula for elasticity, which is the percentage change in the quantity demanded divided by the percentage change in the price. In this case, the price elasticity of demand for strawberries is -24% / -18% = 1.33. A price elasticity greater than 1 indicates that the demand for strawberries is elastic. This means that a change in price leads to a proportionally larger change in quantity demanded.

Cross-Price Elasticity of Demand Between Strawberries and Plums

To calculate the cross-price elasticity of demand between strawberries and plums, you use the percentage change in the quantity demanded of one good (plums) divided by the percentage change in the price of another good (strawberries). The cross-price elasticity of demand is -12% / -18% = 0.67. Since this value is positive, it suggests that the two goods are substitutes. A decrease in price of strawberries causes a decrease in the demand for plums.