Question

Matt purchases 4 boxes of spinach and 3 pounds of tomatoes per month when the price of spinach is $1.50 per box. He purchases 5 boxes of spinach and5pounds of tomatoes per month when the price of spinach is $1.00 per pound. Using the midpoint method, Matt's cross-price elasticity of demand for spinach and tomatoes is__________.

Answer 1

Answer: Cross-price elasticity of demand is -1.25, and spinach and tomatoes are complements.

Explanation: From the question above, we have:

Q1 for spinach= 4 boxes

Q1 for tomatoes = 3 pounds

Q2 for spinach= 5 boxes

Q2 for tomatoes= 5 pounds.

P1= $1.50

P2= $1

The midpoint formula is given as:

[(Q2 - Q1)/(Q2 + Q1/2)] ÷ [(P2 - P1)/(P2 + P1/2)]

Therefore, using the midpoint method the to compute the percent change in quantity of good tomatoes, we have:

(5-3) / [(5 + 3)/2] = 0.5.

To compute the percent change in price of spinach, we have:

(1.00-1.50) / [(1.00+1.50)/2] = -0.4.

Now, by dividing the percent change in quantity of tomatoes by the percent change in price of spinach we will get the cross-price elasticity of demand, thus:

=> 0.5/-0.4= -1.25.

From the answer, we can conclude that, when two goods have a negative cross-price elasticity, they are complements.

Answer 2

Answer:

-1.25

Explanation:

Given that

Q1 of tomatoes = 3

Q2 of tomatoes = 5

P1 = 1.50

P2 = 1

Using midpoint formula

Recall that

Midpoint = [(Q2 - Q1)/(Q2 + Q1/2)] ÷ [(P2 - P1)/(P2 + P1/2)]

Thus

(5 - 3)/(5+3/2) ÷ (1 - 1.5)/(1 + 1.5/2)

= 2/4 ÷ -0.5/1.25

= 0.5 ÷ -0.4

= - 1.25

The cross price elasticity of demand is -1.25 and they are thus compliments.