Question

The crops price elasticity of demand for come with respect to pepsi was estimated to be +0.65.

Calculate and explain the percentage by which the quantity demanded of come will change if there is a 6% increase in the price of pepsi. You are advised to show your working.

3 marks

Answer 1

By the definition of the cross price elasticity of demand, we have:

$$E_d=\dfrac{\%\ change\ in\ quantity\ of\ come}{\%\ change\ in\ price\ of\ pepsi},$$ $$\% \Delta Q_{come}=E_d\% \Delta P_{pepsi}=0.65\cdot6\%=3.9\%$$

The quantity demanded of come will change by 3.9% if there is a 6% increase in the price of pepsi.