Answer to Question #269381 in Macroeconomics for dodomybae

Question

Last month sellers of good Y took in $100 in total revenue on sales of 50 units

Answer 1

The price of good Y increased from $\frac{100}{50}=$ $2 to $\frac{120}{40}=$ $3. Meanwhile, the quantity demanded of good X increased from 20 to 40.

Thus, the Cross price elasticity is:

$CPED=\frac{\frac{(40-20)}{(40+20)}}{\frac{(3-2)}{(3+2)}}=\frac{5}{3}=1.67$

Since the cross price elasticity of demand is positive, the two goods are substitutes.

They are substitutes and have a cross price elasticity of 1.67.