Question

Last month, sellers of good Y took in $100 in total revenue on sales of 50 units of good Y. This month sellers of good Y raised their price and took in $120 in total revenue on sales of 40 units of good Y. At the same time, the price of good X stayed the same, but sales of good X increased from 20 units to 40 units. We can conclude that goods X and Y area. They are substitutes, and have a cross-price elasticity of 0.60. b. They are complements, and have a cross-price elasticity of 0.60. c. They are substitutes, and have a cross-price clasticity of 1.67. d. They are complements, and have a cross-price elasticity of 1.67.

Answer 1

Answer:

Option c = They are Substitutes and have cross price elasticity of 1.67

Explanation:

Cross-Price Elasticity = %change in Quantity demanded of  good X

                                      %change in Price of good Y

% change in Quantity Demanded of good X = Q2-Q1   × 100

                                                                            (Q1+Q2)

                                                                                2

% change in Quantity Demanded of good X = 40-20 ×100

                                                                            (20+40)

                                                                                 2

% change in Quantity Demanded of good X = 66.67%

% change in price of good Y = P2-P1 × 100

                                                  ( P1+P2)

                                                       2

Last month Total Revenue = $100

Total Units = 50

Last month Price / unit = 100/50 = $2

This Total Revenue $120

Total units 40

This monthPrice / unit = 120/40 = $3

% change in price of good Y= 3 - 2     × 100

                                                    3+2

                                                      2

% change in price of good Y = 1   × 100

                                                  2.5

% change in price of good Y = 40%

Cross-Price Elasticity = 66.67

                                        40

Cross- Price Elasticity = 1.67

Since its greater than 1 its Cross price elasticity of Substitute

also as the price of good y increased from $2 to $3 the quantity demanded of good x increased although its price remained constant which indicates its a substitute good as  people preferred buying good x instead of good y