Final answer:
The diversion ratio is -0.5.
Step-by-step explanation:
The diversion ratio measures the proportion of customers that transfer from one firm to another in response to a change in price. In this case, firm A increases its price by 16% and experiences an increase in demand of 4 units at firm B. To calculate the diversion ratio, we first need to calculate the price elasticity of demand for firm A.
The price elasticity of demand is calculated using the formula: elasticity = (percentage change in quantity demanded) / (percentage change in price). Given that the own-price elasticity of demand for firm A is -0.5, we can assume that a 16% increase in price will result in a 16% * -0.5 = -8% change in quantity demanded. Since firm B experiences an increase in demand of 4 units, the diversion ratio between the two firms would be 4 / -8 = -0.5.