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Nesterboy [21]
3 years ago
8

Suppose the demand curve for a product is given by Q=10-2P+Ps1, where P is the price of the product and Ps is the price of a sub

stitute good. the price of the substitute good is $2.00.
a. Suppose P=$1.00, what is the price elasticity of demand? what is the cross-price elasticity of demand?

b. Suppose the price of the good, P, increases to $2.00. Now, what is the price elasticity of demand, and what is the cross-prices elasticity of demand?
Business
1 answer:
Rudik [331]3 years ago
5 0

Solution:

a. Find quantity demanded when P = $1.00 and P_{s}= $2.00

Q = 10 - 2(1) + 2 = 10

Price elasticity of demand = \frac{p}{q}  ΔQ / ΔP = \frac{1}{10} (-2) = -\frac{2}{10} = -0.2

Cross-price elasticity of demand = \frac{P_{s} }{q} ΔQ / ΔP_{s} = \frac{2}{10} (1) = 0.2

b. When P = $2.00

             Q = 10 - 2(2) + 2 = 8

Price elasticity of demand = \frac{p}{q} ΔQ / ΔP = \frac{2}{8} (-2) = -\frac{4}{8} = -0.5

Cross-price elasticity of demand = \frac{P_{s} }{q} ΔQ / ΔP_{s} = \frac{2}{8} = 0.25

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