Question

Suppose the following table describes Jocelyn’s weekly snack purchases, which vary depending on the price of a bag of chips:

	Quantities
Price of bag of chips	Bags of chips	Containers of salsa	Bags of pretzels	Cans of soda
$1.00	2	3	1	4
$1.50	1	2	2	4

Remember: in ALL elasticity formulas, % chg in Quantity goes on top. % chg in Price goes on the bottom. The bottom (% chg in price) will be the same in all of these.  The sign matterson these.  If the two variables (price and quantity) move in the same direction (i.e,. both increase or decrease together), then the sign will be positive.  But if one increases while the other decreases, the sign will be negative.  For example, as the price of chips increases from $1 to $1.50, bags FALL from 2 to 1. They move in opposite directions, so this will be a negative sign.  In my opinion, this is the easiest way to keep track of the sign and not get mixed up with the calculations.  

5. Compute the cross-price elasticity of salsa with respect to the price of a bag of chips.  Are chips and salsa substitutes or complements? How do you know?

yes

6. Compute the cross-price elasticity of pretzels with respect to the price of a bag of chips.  Are chips and pretzels substitutes or complements? How do you know?

                   substitues

7. Compute the cross-price elasticity of soda with respect to the price of a bag of chips.  Are chips and soda substitutes or complements? How do you know?

(hint:  don’t actually do calculations here.  Think—what is the % change in cans of soda?  That will give you the answer.)

Answer 1

• Cross price elasticity of containers of salsa with respect to the price of a bag of chips

Yes chips and salsa are complements. Since, the cross price elasticity is -0.66 i.e negative and we can clearly see that as the price of bag of chips increases, the quantity of containers of salsa reduces. That means as the price of chips increase Jocelyn buys them less and so buy less of its complement as well which is salsa.

• Cross price elasticity of pretzels with respect to the price of a bag of chips

Bags of pretzels and bags of chips are substitutes because as the price of chips increases, the qauntity of bags of pretzels also increases with a positive elasticity of 2. Which means that when the price of chips increases, Jocelyn buys less of that and switches to pretzels which is indicated by the increase in their demand and so we know they are substitute goods.

• We can clearly see that the change in quantity of soda is 0 i.e %change in quantity of soda cans is 0 which makes the cross price elasticity 0 that is the change in price of bags of chips does not affect the quantity of soda cans bought. This means that chips and soda are goods which are independant of each other.