5. A distinctive tobacco shop in Chicago has been selling 5,000 pounds of pipe t

Question

5. A distinctive tobacco shop in Chicago has been selling 5,000 pounds of pipe tobacco per year. Due to competition, the average price of a pipe has recently declined from S15 to S12. As a result, the demand for the shop's pipe tobacco has increased to 6,000 pounds per year. Calculate the cross-price elasticity of demand for pipe tobacco (X) due to a change in the price of a pipe (R). Use the arc-elasticity formula. (The X and R notation is consistent with the text.) Formula used: a. Items given and their values: Your work: Answer: b. Confirm that the two goods are complements. (Confirm with a statement.)

Explanation / Answer

Cross price elasticity = %change in the quantity of good X / % change in the price of Y.

%change in the quantity of good X = (6000 -5000) / (6000+5000)

= 1000/11000

= 0.09.

% change in the price of good Y = (12 -15) / (12 + 15)

= -3 / 27

= -0.11

Cross price elasticity = 0.09/-0.11

= -0.02.

as the cross price elastity is negative two goods are complements.

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