Question

In: Economics

Calculate the cross elasticity of demand for B when the price of A decreases from $7.50 to $6.50. Are A and B complements or substitutes?

The following table shows the relationship between the price of product A and the quantity demanded for products A and B

Price of A ($)

Quantity demanded for A (kg)

Quantity demanded for B (kg)

Consumers’ income ($)

6.0

100

20

2000

6.5

90

30

1800

7

70

50

1600

7.5

40

70

1400

8

10

85

1200

Calculate the cross elasticity of demand for B when the price of A decreases from $7.50 to $6.50. Are A and B complements or substitutes?

Solutions

Expert Solution

Cross price means when there is change in the price of one good, then it affect the quantity demand of its related good.

When due to % change in the price of one goods leads to change in the % change in the quantity demand, it is known as the cross price elasticity demand.

Cross-price elasticity of demand= % change in the quantity demand/ % change in the price

When substitute good price changes then the change in the price and change in the quantity demand of the related good will move in the same direction.

When complementary good price changes then the change in the price and change in the market demand of the related good will move in the opposite direction.

Rahul Sunny answered 2 years ago
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