Answer:
a) Cross elasticity = -8.02
b) these are complementary items because the cross elasticity of gonorrhea and alcohol is less than 1.
Explanation:
Cross Price Elasticity is calculated using the following formula
[(Q2-Q1) / (Q2-Q1/2)] / [(P2-P1)/ (P2-P1/2)]
The meaning of the formula is the change in the quantity demanded of a good divided by the percentage change in the price of another good or product.
In this case we are comparing how the demand for alcohol affects the occurrence of gonorrhea.
1) We determine the change in the issues of gonorrhea.
The initial cases of Gonorrhea Q1 is 7,450 but it later reduced by 1600 due to an increase in alcohol price by 3%
Q2 = 7,450-1600= 5,850
Q1= 7,450
Plugging this into the formula we determine the percentage of decrease in gonorrhea.
= [(Q2-Q1) / (Q2-Q1/2)]
= (5850-7540) / (5850-7450 /2)
= -1600/6,650 x 100
= -24.06%
2) We already know the change in the price of Alcohol to be 3% increase due to tax
<u>Hence, the cross elasticity of the two as given in the formula above</u>
= The percentage change in the cases of gonorrhea / the percentage change in the price of alcohol
= -24.06% / 3%
= -8.02
Also, these are complementary items because the cross elasticity of gonorrhea and alcohol is less than 1.
