Question

Using the midpoint method described in the textbook, find the cross-price elasticity of demand for FedEx and UPS overnight shipping. The price of FedEx increased from $65 to $75. The quantity demanded of UPS increased from 1.2 million packages per day to 1.3 million. Round to two decimal places as necessary.

Answer 1

Answer:Cross Elasticity of Demand = 0.56

Explanation:

Cross Elasticity of Demand = Percentage change  in quantity demanded/Percentage change  in price .

Using the midpoint formulae

Percentage change  in quantity  of UPS=Q2 - Q1/ Q2+Q1/2

=1,300,000 - 1,200,000/(1,300,000 + 1,200,000)/2=0.1/1.25 =0.08

Percentage change  in Price of  FedEx = P2 -P1/ (P1+P2)/2

=75-65/(75+65)/2=10/70=0.1428

Cross Elasticity of Demand = Percentage change  in quantity demanded/Percentage change  in price .

=0.08/0.1428 = 0.56

Here  the cross elasticity of demand is positive, which trells us that   FedEx and UPS are substitute goods.

Answer 2

Answer: 0.56

Explanation:

Midpoint for Quantity change

$= \frac{\frac{Q_{2} - Q_{1} }{Q_{2} + Q_{1}} }{2}\\ = \frac{\frac{1.3 - 1.2 }{1.3+ 1.2} }{2}\\\\= 0.08$

Midpoint for Price change

$= \frac{\frac{P_{2} - P_{1} }{P_{2} + P_{1}} }{2}\\ = \frac{\frac{75 - 65 }{75+ 65} }{2}\\\\= 0.142$

Cross price elasticity of demand = Change in quantity / Change in price

= 0.08/0.142

= 0.56