Question

In: Economics

You are given the following demand table which shows the relationship between the price of a...

You are given the following demand table which shows the relationship between the price of a Honda Civic and the quantity demanded of Civics and Toyota Corollas:

Price of Civic Quantity of Civics Quantity of Corollas

$20,000 600 1000

$16,000 1200 800

a) What is the arc price elasticity of demand for Civics?

b) What is the cross-price elasticity of demand for Corollas with respect to Civics?

Expert Solution

Price of Civic	Quantity of Civic	Quantity of Corollas
$20,000	600	1000
$16,000	1,200	800

Civic Q1 = 600 , Q2 = 1200 , P1 = $20,000, P2 = $16,000

Corolla C1 = 1000 , C2 = 800

Midpoint of Q = (Q1 + Q2) / 2 , Midpoint of P = (P1 + P2) / 2

A). ARC price elasticity of Demand for Civic = Change in demand (Q 2 - Q 1) / Midpoint of Q / Change in Price (P 2-P 1)/ Midpoint of P

= 1200-600 / (1200+600) / 2 / 16,000 - 20,000 / (20,000 + 16,000) / 2 = 600 /900 / 4,000 /18,000 = (2/3) / (2/9) = 3

Hence, Arc elasticity of demand is 3, which is greater than 1, so our demand for civics is elastic here.

B). Cross price elasticity of Demand = % change in quantity demanded of Corolla / % change in the price of civic

= (800 - 1000) *100 / 1000 / (16000 - 20000) * 100 / 20000

= 200 / 1000 / 4000 / 20000 = 1

So, Cross price elasticity between the demand of Corolla and the price of civic is 1 i.e Unitary Elastic. It means the percentage change in quantity demand of corolla is equivalent to the percentage change in the price of civic.

Rahul Sunny answered 2 years ago

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