In: Economics
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?
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.