Question

Suppose the price of pepper increases by 25 percent and, as a result, the quantity of salt demanded( holding the price of salt constant) increases by 1 percent.

the cross-price elasticity of demand between pepper and salt is ___ ( enter your response rounded to two decimal places and include a minus sign if appropriate.)
In this example, pepper and salt are
a. Not related
b. Substitutes
c. Complements

If so, than the cross price elasticity of demand between pepper and salt would be?
a. Less than 1
b. Negative
c. Zero
d. Greater than -1
e. Positive

Answer 1

The cross-price elasticity of demand between pepper and salt is 0.04, indicating that they are substitutes. Since the elasticity is positive and less than 1, this suggests salt is a weak substitute for pepper.

Step-by-step explanation:

The cross-price elasticity of demand measures the responsiveness of the quantity demanded for one good in response to a change in the price of another good. When the price of pepper increases by 25 percent and the quantity of salt demanded increases by 1 percent, holding the price of salt constant, the cross-price elasticity of demand between pepper and salt can be calculated using the formula (percentage change in quantity demanded of Good A) / (percentage change in price of Good B). In this case, the cross-price elasticity of demand is (1% change in quantity of salt) / (25% change in price of pepper) which equals 0.04.

Considering the relationship between pepper and salt in this scenario, if the cross-price elasticity of demand is positive, this indicates that the goods are substitutes. Therefore, pepper and salt are substitutes as the increase in the price of pepper leads to an increase in quantity demanded for salt. Given this, the cross-price elasticity of demand would be positive and less than 1.