Answer to Question #312771 in Microeconomics for souljaboy

Question

Acme Tobacco is currently selling 5,000 pounds of pipe tobacco per year. Due to competitive pressures, the average price of a pipe declines from $15 to $12. As a result , the demand for Acme pipe tobacco increases to 6,000 pounds per year.

a) what is the cross elasticity of demand for pipes and pipe tobacco?

b) Assuming that the cross elasticity does not change, at what price of pipes would the demand for pipe tobacco be 3,000 pounds per year? Use $15 as the initial price of a pipe.

Answer 1

a) Cross elasticity measures the relationship between one product to another and is calculated by percentage change in quantity demanded for pipe tobacco over percentage change in price of pipes.

6000-5000/5000 x100=20%

12-15/15 x100= -20%

Therefore cross elasticity of demand is 20%/-20%= -1. The cross elasticity of demand is -1, implying that the goods are complementary goods. They are complementary because a decline in the price of pipes leads to an increase in the quantity demanded of pipe tobacco.