Question

10. When price of tea in local café rises from Br. 5 to 10 per cup, demand for coffee rises from 3000 cups to 5000 cups a day despite no change in coffee prices.
a. Determine cross price elasticity
b. Based on the result, what kind of relation exists between the two goods?

Answer 1

solution

(1)percentage change in price of tea=$\frac{(10-5)}{5}\times100=100$ %

percentage change in quantity demanded of coffee=$\frac{(5000-3000)}{3000}\times100=66.6$ %

cross price elasticity(XED)=(% change in quantity demanded of good A ) / (% change in price of good B)

$XED=\frac{66.6}{100}\\XED=0.66$

(2)cross price elasticity is positive so these goods are substitute.