Question

Rising peanut prices have forced peanut butter makers to raise the price of a jar of peanut butter from $2 to $3 per jar, causing quantity demanded to fall. In addition, sales of jelly also dropped by 15%. Using the midpoint method, calculate the cross elasticity of demand between peanut butter and jelly.

Answer 1

37.5%

Step-by-step explanation:

The percentage change in the price of a jar of peanut butter, using the midpoint method, is:

`P_B = (3-2)/((3+2)/(2))*100=40\%`

The percentage change in sales of jelly is 15%.

The cross elasticity of demand between peanut butter and jelly is:

`E = (15\%)/(40\%)*100\%\\E=37.5\%`

The cross elasticity of demand is 37.5%