Question

A local bakery gives information on consumer purchasing habits for donuts and croissants. It says that when the price of a donut is $1.20, people buy 50 croissants. When the price of a donut is raised to $1.40, the number of croissants purchased goes up to 65 . The cross-price elasticity of demand using the midpoint method is

a. +1.70
b. +0.59
c. +0.75
d. +1.30
e. +2.00
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Answer 1

The cross-price elasticity of demand is 1.70.

Step-by-step explanation:

The cross-price elasticity of demand can help determine how the demand for one good changes as the price of another good changes. It is calculated by taking the percentage change in the quantity demanded of one good divided by the percentage change in the price of the other good.

In this case, we are given that when the price of a donut is $1.20, people buy 50 croissants. When the price of a donut is raised to $1.40, the number of croissants purchased goes up to 65. Using the midpoint method, we can calculate the cross-price elasticity of demand as follows:

Percentage change in quantity = (65-50)/((50+65)/2) = 15/57.5 = 0.26 or 26%

Percentage change in price = (1.40-1.20)/((1.20+1.40)/2) = 0.20/1.30 = 0.153 or 15.3%

So, the cross-price elasticity of demand is 0.26/0.153 = 1.70