Question

Let qa be the quantity demanded of good a, pa be the price of good a, pb be the price of good b, and m be income. let the demand equation be qa=86-5pa-4pb+2m. if we know that pa=6, pb=3, and m=30, then the approximate value of the cross-price elasticity of demand is:

Answer 1

Answer: Cross price elasticity is - 0.12

Explanation:

Cross price elasticity measures the responsiveness of quantity demanded of good a to a change in any of its related variable such as good b.

$Qa=86-5Pa-4Pb+2M$

Given,

Pa=6, Pb=3, and M=30,

$Qa = 86 - 5(6) - 4(3) + 2(30)$

$Qa = 86 - 30 - 12 + 60$

$Qa=104$

So, cross price elasticity is given by

$e_{pb} = \frac{Change in Qa}{Change in Pb} * \frac{Pb}{Qa}$

$e_{pb} = -4 * \frac{3}{104}$

$e_{pb} = -0.1153$

Since, cross price elasticity is negative it means that good a and good b are complements to each other.