Answer to Question #134460 in Microeconomics for Matusal mengistu

Question

When price of tea in local cafe rises from 10 to 15 dollar per cup demand for coffee rises from 300 cups to 500 cups a day despite no change in coffee price then determine cross price elasticity and based on the result what kind of relation exist between two goods ?

Answer 1

solution

percentage change in price of tea=$\frac{(15-10)}{10}\times100=50$ %

percentage change in quantity demanded of coffee=$\frac{(500-300)}{300}\times100=66.6$ %

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

$XED=\frac{66.6}{50}\\XED=1.33$

cross price elasticity is positive so these goods are substitute.