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.