Given the cross-price elasticity of .75 between Tropicana and Minute Maid orange juice, the price of...

Given the cross-price elasticity of .75 between Tropicana and Minute Maid orange juice, the price of Minute Maid was raised from $1.50 to $2.50, ceteris paribus, how much will % will the quantity purchase of Tropicana rise?

Solutions

Expert Solution

The cross price elasticity of demand between Tropicana and Minute Maid is 0.75

The value of the cross price elasticity of demand is positive.

This means that Tropicana and Minute maid are substitutes.

The price of Minute Maid has increased from $1.50 to $2.50

Calculate the percentage increase in price of Minute Maid -

Percentage increase = [($2.50 - $1.50)/$1.50] * 100 = 66.67%

The price of Minute Maid has increased by 66.67%

In case of substitute goods, increase in price of one leads to increase in quantity demanded of other.

So, increase in price of Minute Maid will lead to increase in quantity demanded of Tropicana.

Cross price elasticity of demand between Tropicana and Minute Maid = Percentage increase in quantity demanded of Tropicana/Percentage increase in price of Minute Maid

Percentage increase in quantity demanded of Tropicana = Cross price elasticity of demand between Tropicana and Minute Maid * Percentage increase in price of Minute Maid

Percentage increase in quantity demanded of Tropicana = 0.75 * 66.67 = 50%

Thus,

The quantity purchased of Tropicana will rise by 50%.

Rahul Sunny answered 1 year ago

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