Answer to Question #110814 in Microeconomics for Jzen

Question #110814
If the rise in the price of a bento box from $3 to $5 results in a rise in the demand for “Wakami” from 700 to 800 units, calculate the cross elasticity of demand between the two goods. State the relationship between both goods.
1
Expert's answer
2020-04-20T10:28:47-0400

The cross-price elasticity of demand is computed as:"%Change in the quantity demanded of X\/%Change in the price of Y" "%Change in the quantity demanded of X\/%Change in the price of Y"



"E_{xy}=\\dfrac{\\text{\\% Change in the quantity demanded of X}}{\\text{\\% Change in the price of Y}}"



Let Wakami be good X and bento box be good Y.

If the demand for Wakami increases from 700 to 800 units as a result of increase in the price of bento box from $3 to $5, then:


"\\text{\\% Change in the quantity demanded of X}= \\dfrac{800 - 700}{700}\\times 100\n\\approx 14.29\\%"

"\\text{\\% Change in the price of Y}= \\dfrac{\\$5- \\$3}{3}\\times 100\n\\approx 66.67\\%"

Therefore:



"E_{xy}=\\dfrac{14.29\\%}{66.67\\%}\\approx 0.214"

The two goods are substitutes since their cross-price elasticity of demand is positive.


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