Question

Beats Studio headphones retail at approximately £200 per unit. Following a change in the price of the headphones (an increase in £20), there is an increased demand for a rival brand of headphones by 5%.

What is the XED of this price change?

Answer 1

The XED (Cross Elasticity of Demand) for the scenario given is calculated to be 0.5, meaning that with a 10% increase in the price of Beats Studio headphones, the demand for a rival brand increased by 5%, signifying a positive but relatively inelastic cross demand response.

Step-by-step explanation:

The XED (Cross Elasticity of Demand) refers to the measure of how the demand for one good (in this case, a rival brand of headphones) changes in response to a price change of another good (Beats Studio headphones). To calculate the XED, we use the following formula:

XED = Percent Change in Quantity Demanded of Good B / Percent Change in Price of Good A

Since the demand for the rival brand of headphones increased by 5% in response to a £20 price increase in Beats Studio headphones, which retailed at approximately £200, we can calculate the price change percentage:

Price Change Percentage = (Price Change / Original Price) * 100

Price Change Percentage = (£20 / £200) * 100 = 10%

Now, we can plug these values into the XED formula:

XED = 5% / 10% = 0.5

Therefore, the XED of this price change is 0.5, indicating a positive but relatively inelastic cross-elasticity, where the demand for the rival headphones has increased but not excessively relative to the price increase of the Beats Studio headphones.