Question

Calculate the cross -price elasticity between the two go8ds and identify how the goos are related. A 20% price increase for product a causes a 10% decrease inits quantity demaned for product b / product c increases in price from $ 3 a pound to $ 4 a pound. This causes the quantity demed for product d to lncrease from 44 units to 85 units. /WHEN THE PRICE OF PRODUCT E DECREASES 9% THIS CAUSES ITS QUANITY DEMANDED TO INCREASE BY 14% AND THE QQUANITY DEMANDED FOR PRODUCT F TO INCREASE 12%.

Answer 1

Solution-

Cross Price Elasticity of Demand = % change in quantity demanded of one good / % change in price of another good.

1. Cross price elasticity of demand for good A and B

Given- 20% increase in price for good A and 10% decrease in quantity demanded for good B

CPED = -10 / 20 (10% decrease hence it is -10)

          = -0.5

Good A and B are complements goods because cross price elasticity of demand coefficient is negative.

2. Cross price elasticity of demand for good C and D

% change in quantity for good D = 85-44 / 44 x 100 = 93%

% change in price for good C = 4 - 3 / 3 x 100 = 33.33%

CPED = 93 / 33.33

          = 2.7

Good C and D are substitutes goods because the cross price elasticity of demand coefficient is positive.

3. Cross price elasticity of demand for good E and F

CPED = 12 / -9 (9% decrease in price for good E)

          = -1.33

Good E and F are complements goods because cross price elasticity of demand coefficient is negative.