Question

3). Calculate the numerical value of cross elasticity in each of the following situations using the mid- point method. In each case identify whether the two products are substitutes or complementary products. The price Julia pays each month for access to internet decreases from $80 to $40, causing the quantity demanded of e-magazines she reads on her computer to rise from 3 to 5. The quantity demanded of do-it – yourself hair- cutting sets increase from 5,000 to 10,000 when the average price of hairstylist’s cut rises from $40 to $60 per hour. A fall in the average price of smartphones from $600 to $400 increases purchases of smartphone apps from 1 million to 3 million per month.

Answer 1

Answer : Cross price elasticity of demand means that percentage change in quantity demanded by one good divided by percentage change in price of another good.

Cross elasticity of demand = % Change in qty demanded in one good / % Change in price of another good

Cross elasticity of demand =

(Q₂ - Q₁)/ (Q₁+ Q₂)/2/ (P₂- P₁)/ (P₁+P₂₎/2

A) Cross elasticity of demand = ( 5-3)/(5+3)/2/(40-80)/(40+80)/2 = 2/4/-40/60= -0.75

Julie has e- book and internet access has negative relationship which shows it is complementary good.

B ) cross elasticity of demand = (10,000 -5000)/ 15000/2 / (60-40)/100/2 = 5000/7500/20/50

= 5000*50/7500*20= 1.67

Julie has substitute relationship with hair tool and hair cutters.

C) cross elasticity of demand = ( 3million-1 million)/ (3+1)/2 / (400-600)/(1000)/2 = 2/2/-200/500 = -2.5

Julie has negative cross price elasticity between smartphone apps and smartphone price.It shows negative relationship exist between them.As complementary goods.