Answer to Question #230666 in Microeconomics for Shebi

Question

Consumer buys 10 units of Good A when the price of Good B is $5. When the price of Good B rises to $6 (the price of Good A remaining unchanged) the consumer buys 14 units of Good A.

Answer 1

Cross Elasticity of demand for Good A = $\frac{\%\;change\; in\; quantity\; demanded\; for\; Good\; A}{\%\; change\; in\; price\; of\; Good\; B}$

$=\frac{Q_{2} -Q_{1}}{(Q_{2}+Q_{1})/2 } \div \frac{P_{2} -P_{1}}{(P_{2}+P_{1})/2 }$

Where: Q₁ = 10, Q₂ = 14, P₁ = 5, P₂ = 6

$= \frac{14 -10}{(14+10)/2 }\div \frac{6 - 5}{(6+5)/2 }$

$=\frac{4}{12} \div \frac{1}{5.5} = \frac{0.33}{0.18} = 1.83$

Cross Elasticity of demand for Good A = 1.83

Interpretation.

Good A is a substitute to good B since the cross price elasticity of demand is positive, Product A and B are substitute goods.