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determining cross elasticity?? How?
I am not looking for an answer, I am simply looking for help on how to do this problem. I am taking an online course and 1/3 of my classmates are also lost. I \"m thinking I divide .2 by .15. any help would be awesome on the following:
Suppose that a 15% decrease the price of normal good Y results in a 20% increase in the quantity demanded of normal good X. Determine the cross elasticity of demand coefficient and the relationship that exists between the two goods.
1 Answer
- PrivateBankerLv 79 years agoFavorite Answer
% change in quantity demanded / % change in price of substitute or complement
(in your case, a complement since the decrease in the price of one good gives rise to an INCREASE in the demand for another good...complements are things like pizza and soda - the cheaper the pizza is, the more soda you can afford...decrease in the price of one results in increase in demand for the other)
CE = 0.20 / (0.15) = (1.333) parenthesis denotes a negative value
FYI: The cross elasticity of demand will be positive for a substitute, and negative for a complement; i.e. demand for a substitute (complement) will go up (down), if the price of the substitute (complement) goes up.
Hope this helps...
