Question

The demand for good X is estimated to be Qx d = 10, 000 − 4PX + 5PY + 2M + AX, where PX is the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. Based on this information, the cross-price elasticity between goods X and Y is:

A. 0.008.

B. −0.08.

C. −0.8.

D. −8.

Answer 1

Ans: 0.008

Explanation:

Qx = 10, 000 − 4PX + 5PY + 2M + AX

Substituting the given values in the above equation,

Qx = 10,000 − 4(50) + 5(100) + 2(25,000) + 1,000

        = 10,000 - 200 + 500 + 50,000 + 1,000

        = 61,300

Here, the substitute good's price is $100

Cross-price elasticity between goods X and Y = ∆Qx / ∆Py * (Py / Qx)   

                                                                              [ Where, ∆Qx / ∆Py is the price coefficient of good Y in the demand function]

                                                                        = 5 * (100 / 61,300)

                                                                        = 0.008

Thus, option [A] is correct answer.