Answer:
a. Cross-price elasticity between A and B: 0. Relationship between A and B: No relationship.
b. Cross-price elasticity between C and D: 2.22. Relationship between C and D: Substitute.
c. Cross-price elasticity between E and F: -8.50. relationship between E and F: Complimentary.
Explanation:
a. Cross-price elasticity between A and B: relationship between A and B:
Percentage change in price of A = 20%
Percentage change in quantity of B = 0%
Cross-price elasticity between A and B = 0%/ 20% = 0.00
Relationship between A and B = No relationship
Note: There is no relationship between A and B because the cross-price elasticity between A and B is zero. That is, change in the price of A does not have any effect on the quantity demanded of B.
b. Cross-price elasticity between C and D: relationship between C and D:
Percentage change in price of C = {($4 - $3) / [($4 + $3) / 2]} * 100 = 28.5714285714286%
Percentage change in quantity of D = {(85 - 44) / [(85 + 44) / 2]} * 100 = 63.5658914728682%
Cross-price elasticity between C and D = 63.5658914728682% / 28.5714285714286% = 2.22
Relationship between C and D = Substitute
Note: The relationship between C and D is substitute because the cross-price elasticity between C and D is positive. That is, an increase in the price of C makes consumer to switch to and buy more of D which is a substitute.
c. cross-price elasticity between E and F: relationship between E and F:
Percentage change in price of E = - 2%
Percentage change in quantity of F = 17%
Cross-price elasticity between E and F = 17%/ (-2%) = - 8.50
Relationship between E and F = Complimentary.
Note: The relationship between E and F is complimentary because the cross-price elasticity between E and F is negative. That is, an increase in the price of E makes consumer to buy more less F which is a compliment or use together with E.
