Question

Janet is shopping for bottles and formula for her four-month old baby. Last month, the price of her favorite brand of formula was $15 per can. She bought six bottles last month as well. This month the price of the can of formula has increased to $17. As a result, she will only purchase three new bottles on this trip. Which of the following statements is true about the cross-price elasticity?
a. The cross-price elasticity is 1.2.
b. The cross-price elasticity is - 5.33.
c. The goods are complements.
d. The cross-price elasticity is 5.33.
e. The goods are substitutes.
f. The cross-price elasticity is -1.2.

Answer 1

Answer: b. The cross-price elasticity is -5.33.

c. The goods are complements.

Explanation:

The cross elasticity of demand is used to measure how the percentage change of the quantity demanded for a particular good has an effect on the percentage change in the price of another good.

Based on the values given above, the cross elasticity of demand will be:

= [(3 - 6) / (17 - 15)] × [(15 + 17) / (6 + 3)]

= (-3/2) × (32/9)

= -1.5 × 3.56

= -5.33%

Since it's a negative value, the goods are complement.

The correct options are B and C.