Question

A local bakery gives information on consumer purchasing habits for muffins and cupcakes. It says that when the price of a muffin is $1, people buy 55 cupcakes. When the price of a muffin is raised to $2, cupcake purchases increase to 65 cupcakes. The cross-price elasticity of demand using the midpoint method is _________________ .

Answer 1

The cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good.

Step-by-step explanation:

The cross-price elasticity of demand measures the responsiveness of the quantity demanded of Good A to a change in the price of Good B. It is calculated by dividing the percentage change in the quantity demanded of Good A by the percentage change in the price of Good B. In this case, the cross-price elasticity of demand can be calculated using the midpoint method.

Using the given information, the percentage change in price is 100% (from $1 to $2), while the percentage change in quantity demanded of cupcakes is 18.2% (from 55 to 65 cupcakes). Therefore, the cross-price elasticity of demand using the midpoint method is 18.2 / 100 = 0.182.