Calculate the cross-price elasticity for the following goods. Determine if they

ID: 1095748 • Letter: C

Question

Calculate the cross-price elasticity for the following goods. Determine if they are substitutes or complements?

A. The price of airline tickets goes up by 20 percent, causing the quantity demanded for gasoline to go up by 5 percent.

B. The price of pancake flour goes up by 10 percent, causing the quantity demanded for pancake syrup to drop by 20 percent.

C. The price of coffee goes up by 5 percent, causing the quantity demanded for tea to increase by 5 percent.

D. The price of computers goes up by 5 percent, causing the quantity demanded for flash drives to drop by 2 percent.

A.The price of airline tickets goes up by 20 percent, causing the quantity demanded for gasoline to go up by 5 percent

Cross elsticity = %change in Q/%change in P = 5/20 = .25 since cross elsticity is positive they are substitutes.

B. The price of pancake flour goes up by 10 percent, causing the quantity demanded for pancake syrup drop by 20 percent.

elsticity = -20/10=-2, they are complements.

C. The price of coffee goes up by 5 percent, causing the quantity demanded for tea to increase by 5 percent.

Elsticity = 5/5 =1, substitutes

D. The price of computers goes up by 5 percent, causing the quantity demanded for flash drives to drop by 2 percent.

Elasticity = -2/5 = -0.4 complements.

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