Question

As in the previous question: Quantity demanded for good A is given by the following:

Q(A) = 100 - 0.2P(A) - 0.1P(B)-0.5Y,

where P(A) is the price of good A, P(B) is the price of good B, and Y is consumer income.

What is the cross price elasticity of demand for good A with respect to a change in the price of good B when Q(A)=2 and P(B)=4?

Question 7 options:

	E=-0.2*P(B)/Q(A)= -0.2*4/2
	E=-0.2* Q(A)/ P(B)= -0.2*2/4
	E=-0.1* Q(A)/ P(B)= -0.1*2/4
	E=-0.1*P(B)/Q(A)= -0.1*4/2

As in the previous question: Quantity demanded for good A is given by the following:

Q(A) = 100 - 0.2P(A) - 0.1P(B)-0.5Y,

where P(A) is the price of good A, P(B) is the price of good B, and Y is consumer income.

Suppose Q(A)=2 and P(B)=4. If the price of good B is projected to increase by 10%, by how much will demand for good A change?

Question 8 options:

	-0.2%
	-2%
	+20%
	+0.2%
	-20%
	+2%

Answer 1

(a) The cross price elasticity of demand is defined as the proportionate change in the quantity demanded of good x resulting from the proportionate change in the price of good y. Symbolically,

Now, we are provided the following demand function:

To calculate cross price-elasticity, we shall differentiate the function w.r.t P(B) i.e. dQ(A)/dP(B):

Using above elasticity formula, we get

This is equivalent to option 4 in the question.

(b) If price of the good B increases by 10%, then the impact on quantity demanded for Good A would be:

.

Thus, quantity of Good A will fall by 2%