Question

Suppose that you are a staff economist with an economic consulting firm. The operator of a local harbor has commissioned your firm to do a market analysis of the demand for berths (parking spaces) for boats. Your firm finds that the cross-price elasticity between berths and boat fuel is -2.15. You've just completed your study of elasticities and are asked to make a recommendation based on this information. If the price of boat fuel in the area increases by 4% with no change in the price of a berth, the quantity of berths that people demand will:

Answer 1

Answer:

Following the formula $E= ΔX/ΔY$

where  ΔX= changes in the quantity of berths

and  ΔY= changes in the price of fuel

The result is that after a 4% increase in the price of fuel, the quantity of berths will decrease in 8.6%.

Explanation:

Cross-Price Elasticity is the result of the division between the porcentual changes in quantity of the good X (in this case berths) against porcentual changes in the price of good Y (in this case the price of fuel). In this case they are complementary goods, and an increase in one will decrease the quantity of the other.