Demand for X increases from 100 to 125 when the price of Y increases from $5 to $6.
What is the cross-price elasticity of demand?
Cross Price Elasticity of Demand:
The cross price elasticity of demand measures how quantity demanded changes with respect to changes in the price of another good. This elasticity determines whether two goods are gross complements or gross substitutes.
Answer and Explanation:
The cross-price elasticity is the percentage change in the quantity demanded for X divided by the percentage change in the price of Y. The percentage change in the price of Y is:
- (6 - 5) / 5 = 20%
The percentage change in the quantity demanded for X = (125 - 100) / 100 = 25%. Thus the cross price elasticity is;
- cross price elasticity = 25% / 20%
- cross price elasticity = 1.25
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Learn more about this topic:
from Economics 101: Principles of MicroeconomicsChapter 2 / Lesson 12