Answer to Question #139974 in Microeconomics for Aman Tutt

Question

Goods A and B are related goods.

The price of good A is $6.

When the price of good B is $29, demand for good A is P = 9 - 0.025QA.

When the price of good B is $31, demand for good A is P = 11 - 0.02QA.

Calculate the cross price elasticity of demand.

Answer 1

cross elasticity of demand=$\frac{percentage change in quantity demanded}{percentage change in price}$

% change in quantity demanded

$Q_1=9-(0.025\times 6)=8.85$

$Q_2=11-(0.02\times6)=10.88$

%change in Q=(10.88-8.85)$\times100$ =203%

%change in price=(31-29)$\times100$=200%

Therefore; Cross price elasticity of demand= $\frac{203}{200}=1.015$