Question

1.a.In words, what does the cross price elasticity of demand measure?

b.Would the cross price elasticity of demand between Evian bottled water and Fiji bottled water be positive or negative? Explain.

c.Which would be larger (in absolute value), the cross price elasticity of demand between Evian and Fiji water or that between Evian water and Sprite soda? Explain briefly.

Answer 1

a) Cross price elasticity of demand measures the changes in quantity demanded of one good ( say good X ) in response to price changes in another good ( say good Y ) .

b) Evian bottled water and Fiji bottled water are two varieties of bottled water . So they are substitutes , very close or even identical substitutes . So the cross price elasticity of demand will be positive . When price of one rises , quantity demanded for another type rises . So there is a direct relationship , hence positive . One can be easily substituted for another when price of one rises .

c) In the case of perfect substitutes, the cross elasticity of demand will be equal to positive infinity . So we can easily say that Evian and Fiji are near perfect or maybe perfect substitutes . Bur Evian water and soda sprite are not that close substitutes , soda can never replace water fully . So the absolute value of the cross price elasticity of demand will be larger in Evian and Fiji water .