Question

Cross-Elasticity Exercise:

Suppose that when the price of a burger decreases from $2.00 to $1.75 and other things remain the same, the quantity demanded of burgers increases from 200 an hour to 400 an hour and the quantity demanded of pizza decreases from 400 an hour to 200 an hour. At the same time, the quantity demanded of soda increases from 150 an hour to 300 an hour.

   1a.Calculate the cross elasticity of demand for soda with respect to burgers.

1b. Are soda and burgers substitutes or complements? Why?

1c. Calculate the cross elasticity of demand for pizza with respect to burgers.

1d. Are pizza and burgers substitutes or complements? Why?

1e. Describe how the demand for soda and the demand for pizza have changed.

Answer 1

1a.Calculate the cross elasticity of demand for soda with respect to burgers. Exy = -5.00 (Mid Point Elasticity Method)

1b. Are soda and burgers substitutes or complements? Why? Yes the two are complements as with an decrease in price of burgers the demand for soda has gone up. This indicates that soda and burgers are consumed together.

1c. Calculate the cross elasticity of demand for pizza with respect to burgers. Exy = 5.00

1d. Are pizza and burgers substitutes or complements? Why? Pizza and Burger are substitutes as with a decrease in price of burger the demand for pizza has gone down indicating the demand shifting towards burgers from pizza.

1e. Describe how the demand for soda and the demand for pizza have changed. The demand for soda has gone up whereas the demand for pizza has gone down.

Pburger	Qburger	Qpizza	Qsoda	Change in Pburger	Change in Qburger	Change in Qpizza	Change in Qsoda	Average Pbur	Average Qbur	Average Qpizza	Average Qsoda	Ed(Burgers and Soda)	Ed (Pizza and Burger)
2.00	200	400	150
1.75	400	200	300	-0.25	200.00	-200.00	150.00	1.88	300.00	300.00	225.00	-5.00	5.00
												Complements	Substitutes

The formula used is

Exy = (Change in Qx/Change in Py)*(Average of Py/Average of Qx)