Question

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 demand for onions with respect to the price of tomatoes is closest to:
A. -1.0597.
B. -0.0242.
C. -0.0081.

Answer 1

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.