Question

A 10% decrease in the price of gas grills leads to a 15% increase in the demand for flank steaks. The cross-price elasticity of demand between gas grills and flank steaks is:

a)15.0.
b)-1.5.
c) 1.5.
d) -15.0.

Answer 1

B. -1.5

Explanation

ELASTICITY of DEMAND is the responsivenes of demand to change in its factors (good price , related goods price, income , taste)

CROSS ELASTICITY of Demand refers to demand change due to 'related goods price' factor. It is positive in case of Substitute goods (having direct relationship) , negative in case of Complementary (having inverse relationship)

FORMULA = %change in demand / % change in price

In this case : %change in flank steals demand / %change in gas grills price

= -15/10 = -1.5 [Complementary Goods]

Answer 2

B) -1.5

Step-by-step explanation:

Cross-price elasticity of demand is calculated by dividing the percentage change in quantity demanded of good A by the percentage change in price of good B.

cross-price elasticity of demand = change in demand of flank steaks / change in price of gas grills = 15% / -10% = -1.5