f. If a 2 percent decrease in the price of strawberries increases the quantity demanded of...

f. If a 2 percent decrease in the price of strawberries increases the quantity demanded of strawberries by 6 percent and increases the quantity of whipped cream demanded by 5 percent, calculate: i. Price elasticity of demand for strawberries.

(1 mark for correct calculation, I mark for interpretation). 6% ------=3 Price elasticity of demand for strawberries is relatively elastic. -2%

ii. Cross elasticity of demand for whipping cream with respect to the price of strawberries. (1 mark for correct calculation, I mark for interpretation).

Expert Solution

a-

Price elasticity of demand for Strawberry = % change in quantity demanded for Strawberry/ % change in price of strawberry = 6/(-2) = -3

It means if price of strawberry increase by 1% its quantity demanded will decrease by 3% and demand is elastic here.

b-

Cross price elasticity of demand = % change in quantity demanded for whipped cream/ % change in price of strawberry = 5/(-2)= -2.5

It means that if price of strawberry increases by 1% then quantity demanded for whipped cream decreases by 2.5%. It also suggests that whipped cream and strawberry are complements.

Rahul Sunny answered 2 years ago

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