If the price of onions is $1.25, household income is $2,500, and the price of tomatoes is $3.75, the cross-price elasticity of d
emand for onions with respect to the price of tomatoes is closest to:
A. -1.0597.
B. -0.0242.
C. -0.0081.
A. -1.0597.
B. -0.0242.
C. -0.0081.
1 answer:
Answer:
B. -0.0242.
Explanation:
Demand function equation
Qod = 3 - 0.05Po + 0.009I - 0.16pt
Po = Price per pound of onion
Pt = Price per pound of tomato
I = Household income
Putting values in the equation
Qod = 3 - (0.05 x 1.25) + (0.009 x 2,500) - 0.16 x 3.75
Qod = 3 - 0.0625 + 22.5 -0.6
Qod = 24.8375
Cross price elasticity of demand = (ΔQod/ΔPt) x (Pt/Qod)
Cross price elasticity of demand = -0.16 x (3.75/24.8375)
Cross price elasticity of demand = -0.0242
Ratio of Change in demand by change in price is -0.16pt as given in the equation for tomato and - 0.05Po for onion.
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