Question

Suppose that when the price of toy cars increases by 10 percent, Theresa buys 5 percent fewer toy cars and 4 percent less of a different toy, blocks. Calculate the cross-price elasticity for toy cars and blocks and indicate if it is positive or negative.

A) Positive
B) Negative
C) Zero
D) Cannot be determined

Answer 1

The cross-price elasticity of demand between toy cars and blocks is -0.4, indicating that they are complements.

Step-by-step explanation:

The cross-price elasticity of demand between two goods measures the responsiveness of the quantity demanded of one good to a change in the price of another good. In this case, we want to calculate the cross-price elasticity between toy cars and blocks.

Let's say the initial price of toy cars is P and the initial quantity demanded is Q. When the price of toy cars increases by 10%, the quantity demanded decreases by 5%. This gives us a percentage change in quantity demanded of -5%. Similarly, the price of blocks decreases by 4%, resulting in a percentage change in quantity of -4%.

To calculate the cross-price elasticity, we divide the percentage change in quantity of blocks by the percentage change in price of toy cars. -4% / 10% = -0.4. Since the cross-price elasticity is negative (-0.4), we can conclude that toy cars and blocks are complements, meaning an increase in the price of toy cars leads to a decrease in the demand for blocks.