Question

Suppose Pump-U-Up lowers the price of its gym membership by 10 percent and as a result, Sweat-It-Out experienced a 16 percent decline in its gym membership. What is the value of the cross-price elasticity

Answer 1

Answer:

The Cross elasticity of demand will be the change in demand at Sweat-it-out divided by the change in price at Pump-U-Up

=-0.16/-0.1

= 1.6

Explanation:

The Price decrease from Pump-U-up = 10%

And the resultant decline in Gym membership at sweat-it-out is 16%

The Cross elasticity of demand will be the change in demand at Sweat-it-out divided by the change in price at Pump-U-Up

=-0.16/-0.1

= 1.6

A Positive Cross - Price elasticity indicates both Gyms are close substitutes of one another.

An attempt by one to lower its price will directly impact negatively in membership of the other.

The strategy often adopted in such line of Business is to keep prices at Par or offer distinctive services outside of the traditional, e.g include a Spar into the gym membership, or access to discounted toning or body building products etc.