Question

Suppose Nationwide increases the insurance premium they charge for their auto policies by 12 percent. In​ response, the demand for State Farm auto policies in a small town increases from 3 comma 000 to 3 comma 300. What is the​ cross-price elasticity of demand for State Farm auto policies in this​ town? Using the midpoint​ formula, the​ cross-price elasticity of demand for State Farm auto policies is nothing. ​(Enter your response rounded to three decimal​ places.)

Answer 1

0.794

Step-by-step explanation:

Cross price elasticity of demand measures the responsiveness of quantity demanded of good A to changes in price of good B.

Cross price elasticity of demand = percentage change in quantity demanded of good A / percentage change in price of good B

Midpoint change in quantity demanded = change in quantity demanded / average of both demands

change in quantity demanded = 3300 - 3000 = 300

average of both demands = (3300 + 3000 ) / 2 = 3150

300/3150 = 0.095238 = 9.5238%

Cross price elasticity = 9.5238% / 12% = 0.794

If cross price elasticity of demand is positive, it means that the goods are substitute goods.

If the cross-price elasticity is negative, it means that the goods are complementary goods.