Final answer:
The cross elasticity of demand of tea for coffee is calculated to be 1.5, indicating that tea and coffee are substitute goods. An increase in the price of coffee has led to an increase in demand for tea.
Step-by-step explanation:
To find the cross elasticity of demand of tea for coffee, we can use the formula:
Cross Elasticity of Demand = (% Change in Quantity Demanded of Tea) / (% Change in Price of Coffee)
Firstly, we calculate the percentage change in price of coffee:
% Change in Price of Coffee = ((New Price - Original Price) / Original Price) x 100
% Change = ((55 - 45) / 45) x 100
% Change = (10 / 45) x 100
% Change = 22.22%
Next, we calculate the percentage change in quantity demanded of tea:
% Change in Quantity Demanded of Tea = ((New Quantity - Original Quantity) / Original Quantity) x 100
% Change = ((800 - 600) / 600) x 100
% Change = (200 / 600) x 100
% Change = 33.33%
Now we can calculate the cross elasticity:
Cross Elasticity of Demand = (33.33%) / (22.22%)
Cross Elasticity of Demand = 1.5
Since the cross elasticity of demand is greater than zero, it indicates that tea and coffee are substitute goods. This means that an increase in the price of coffee leads to an increase in the demand for tea, which is reflected in the positive cross elasticity figure.