Question

Quantity demanded for tea has increased from 100 to 160 units with an increase in the price of the coffee powder from Rs. 40 to Rs. 50. Calculate the cross elasticity of demand between tea and coffee and explain the relationship between the goods.

Answer 1

$Ed=((Qd2–Qd1)/midpointQd)÷((P2–P1)/midpointP)$ according the equation for arc elasticity. And we have

$E=((160-100)/130)÷((50-40)/45)=1.6÷1.25=2.09$

Answer is greater than zero, which means goods are interchangeable