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.

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.
b. Product C increases in price from $3 a pound to $4 a pound. This causes the quantity demanded for Product D to increase from 44 units to 85 units.
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% .

Answer 1

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 of demand = 0 / 0.2 = 0, unrelated products

b. Product C increases in price from $3 a pound to $4 a pound. This causes the quantity demanded for Product D to increase from 44 units to 85 units.

cross price elasticity of demand = 0.93 / 0.33 = 2.82, substitute products

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 of demand = 0.12 / -0.09 = -1.33, complement goods

Step-by-step explanation:

cross price elasticity of demand = (Qx₂ - Qx₁) / [(Qx₂ + Qx₁)/2] / (Py₂ - Py₁) / [(Py₂ + Py₁)/2] /

cross price elasticity of demand = % change of Qx / % change of Py

cross price elasticity of demand > 0, substitute goods

cross price elasticity of demand < 0, complement goods

cross price elasticity of demand = 0, unrelated goods