Question

If the price of peanut butter increases by 25%, causing the quantity demanded of almond butter to rise by 5%, then the cross-price elasticity for peanut butter and almond butter is:

Answer 1

The cross-price elasticity between peanut butter and almond butter is 0.2, indicating that they are substitutes.

Step-by-step explanation:

The cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good.

In this case, we are looking at the cross-price elasticity between peanut butter and almond butter.

If the price of peanut butter increases by 25%, causing the quantity demanded of almond butter to rise by 5%, we can calculate the cross-price elasticity as follows:

Cross-price elasticity = % change in quantity demanded of almond butter / % change in price of peanut butter

= 5% / 25% = 0.2

Since the cross-price elasticity is positive (0.2), we can conclude that peanut butter and almond butter are substitutes.

A 1% increase in the price of peanut butter would lead to a 0.2% increase in the quantity demanded of almond butter.