Question

A. Suppose that when the price of peanut butter rises from $2 to $3 per jar, the quantity of jelly purchased falls from 20 million jars to 15 million jars. Instructions: Round your answer to two decimal places. If you are entering a negative number be sure to include a negative sign (-) in front of that number. The cross-price elasticity of demand between peanut butter and jelly using the mid-point method is:_______ .

The goods are:_______ .
b. Suppose that when the price of peanut butter rises from $2 to $3 per jar, the quantity of jelly purchased increase from 15 million jars to 20 million jars. Instructions: Round your answer to two decimal places. If you are entering a negative number be sure to include a negative sign (-) in front of that number. The cross-price elasticity of demand between peanut butter and jelly using the mid-point method is:_______ .

Answer 1

The cross-price elasticity of demand calculated using the mid-point method shows a result of -11.43% for part a., indicating that peanut butter and jelly are complements. For part b., a similar calculation would reveal whether they are substitutes, depending on the sign of the elasticity.

Step-by-step explanation:

The student is asking to calculate the cross-price elasticity of demand using the mid-point method. Cross-price elasticity measures the responsiveness of quantity demanded for one good when the price of another good changes.

For part a., we can calculate using the formula: Cross-price elasticity of demand = ((New Quantity - Old Quantity) / ((New Quantity + Old Quantity) / 2)) ÷ ((New Price - Old Price) / ((New Price + Old Price) / 2))Plugging in the values for the decrease in jelly purchases when the price of peanut butter rises, we get: ((15 million jars - 20 million jars) / ((15 million jars + 20 million jars) / 2)) ÷ (($3 - $2) / (($3 + $2) / 2)) = (-5 million jars / 17.5 million jars) ÷ ($1 / $2.50) = -0.29 ÷ 0.4 = -0.114 or -11.43% rounded to two decimal places. This means the goods are complements, as the demand for jelly decreases when the price of peanut butter increases. For part b., if the quantity of jelly purchased increased, we would repeat the calculation with the increased quantity, and the sign of the elasticity would indicate that the goods are substitutes.

Answer 2

a) cross price elasticity = {(QJ2 - QJ1) / [(QJ2 + QJ1)/2]} / {(PB2 - PB1) / [(PB2 + PB1)/2]}

cross price elasticity = {(15 - 20) / [(15 + 20)/2]} / {(3 - 2) / [(3 + 2)/2]} = (-5/17.5) / (1/2.5) = -0.71 complements

b) cross price elasticity = {(QJ2 - QJ1) / [(QJ2 + QJ1)/2]} / {(PB2 - PB1) / [(PB2 + PB1)/2]}

cross price elasticity = {(20 - 15) / [(20 + 15)/2]} / {(3 - 2) / [(3 + 2)/2]} = (5/17.5) / (1/2.5) = 0.71 substitutes