Question

For each scenario, calculate the cross-price elasticity between the two goods and identify how the goods are related. Please use the midpoint method when applicable, and specify answers to one decimal place, include signs for negative results. A) A 20% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B. Cross-Price Elasticity Relationship (No Relationship, Substitutes, Complements): B) Product C increases in price from $5 a pound to $11 a pound. This causes the quantity demanded for product D to increase from 10 units to 18 units. Cross-Price Elasticity Relationship (No Relationship, Substitutes. Complements): C) when the price of Product E decreases 9%, this causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase 12%. Cross-Price Elasticity Relationship (No Relationship, Substitutes, Complements):

Answer 1

Cross-price elasticity measures the responsiveness of the quantity demanded for one good due to a price change in another. For the given scenarios, Product B shows no relationship to Product A, Products C and D are substitutes, and Products E and F are complements.

Step-by-step explanation:

The cross-price elasticity of demand measures how the quantity demanded for one good responds to a price change of another good. It's calculated as the percentage change in the quantity demanded for one good divided by the percentage change in the price of the other good.

For the scenarios provided:

A) As there's no change in the quantity demanded for Product B when the price of Product A changes, the cross-price elasticity is 0, indicating No Relationship.

B) Using the midpoint method, the percentage change in quantity demanded for D is 66.7%, and the percentage change in the price of C is 120%. The cross-price elasticity is 0.56 (66.7% / 120%), which means Product C and D are Substitutes since the cross-price elasticity is positive.

C) The percentage change in quantity demanded for F is 12% when the price of E changes by -9%, thus the cross-price elasticity is -1.33 (12% / -9%), indicating that Products E and F are Complements due to the negative cross-price elasticity.

Note that signs are critical: a positive value signifies substitute goods, while a negative value indicates complement goods.

Answer 2

A) A 20% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B. .

The cross price elasticity of demand is zero between product A and product B.(No relationship)

B) Product C increases in price from $5 a pound to $11 a pound. This causes the quantity demanded for product D to increase from 10 units to 18 units.

Definitely, with increase in price of product C, the quantity demanded of product C will decrease.

Cross-Price Elasticity of demand is negative between product C and product D(They are Compliments)

C) when the price of Product E decreases 9%, this causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase 12%. Cross-Price Elasticity demand = 18/12. Positive. (product E and product F are subtitles)

Step-by-step explanation:

CROSS PRICE ELASTICITY OF DEMAND = (% change in quantity demanded for Product A)/( % change in price of product B)

If cross price elasticity > 0, then the two goods are substitutes

If cross price elasticity = 0, then the two goods are independent

If cross price elasticity < 0, then the two goods are complements

From this example we can see that the answer 2 tells us that butter and margarine are substitute goods for each other. When the price of margarine went up, more people switched to butter. You can increase the sales of one good, by increasing the price of the other.