Answer to Question #82401 in Macroeconomics for uzair

Question

A book store opens across the street from the University Book Store (UBS). The new store
carries the same textbooks but offers a price 20 percent lower than UBS. If the cross-price
elasticity is estimated to be 1.5, and UBS does not respond to its competition, how much of
its sales is it going to lose?

Answer 1

If the new store carries the same textbooks but offers a price 20 percent lower than UBS, if the cross-price elasticity is estimated to be 1.5 (so they are substitutes), and UBS does not respond to its competition, then it is going to lose 20%*1.5 = 30% of sales.