if the price of good x increases from $ 4.50 to $ 5.50 and the quantity...

if the price of good x increases from $ 4.50 to $ 5.50 and the quantity demanded of good Y increases from 900 to 1100 units. The cross price elasticity is?

Solutions

Expert Solution

Cross elasticity of demand is defined as percentage change in the quantity demanded of a commodity with respect to a change in the price of its related commodity. The degree of responsiveness of quantity demanded of one commodity to a change in the price of another commodity is called cross elasticity of demand. It is calculated as-

Cross elasticity of demand of a commodity Y with respect to price of another commodity X= percentage change in the quantity demanded of commodity Y/ percentage change in the price of commodity X.

Percentage change in the quantity demanded of commodity Y-

Initial quantity= 900

New quantity= 1100

Change in quantity=1100-900 =200.

Percentage change in quantity demanded of Y= Change in quantity demanded/ initial quantity x 100

= 200/900 x 100

=0.22 x 100

= 22%

Percentage change in quantity demanded of Y= 22%

Now, percentage change in the price of commodity X-

Initial price=$4.50

New price= $5.50

Change in price= $5.50-$4.50= $1.00

Percentage change in the price of commodity X= change in price/ initial price x 100

= $1.00/$4.50 x 100

= 0.22 x 100

= 22%

Percentage change in the price of commodity X= 22%.

So, cross elasticity of demand= 22%/22%

Cross elasticity of demand= 1

Hence, cross elasticity of demand is 1. As price of commodity X increases, quantity demanded of commodity Y also increases. Hence, it indicates a positive cross elasticity of demand.

Rahul Sunny answered 1 year ago

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