Question
Explain how to find cross elasticity of demand with an example
Answers
GPT 3.5
Cross elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. It is calculated using the following formula:
Cross elasticity of demand = ((% change in quantity demanded of Good A) / (% change in price of Good B))
To find the cross elasticity of demand, you first need to gather data on the quantity demanded and prices of two goods, A and B, over a given time period. Then, calculate the percentage change in quantity demanded of Good A and the percentage change in price of Good B.
For example, let's say you are analyzing the cross elasticity of demand between coffee and tea. If the quantity demanded of coffee increases by 10% when the price of tea increases by 5%, you would calculate the cross elasticity of demand as follows:
Cross elasticity of demand = ((10% / 5%) = 2
This means that for every 1% increase in the price of tea, the quantity demanded of coffee increases by 2%. In this case, we would say that coffee and tea are complementary goods, as the increase in price of tea leads to an increase in the quantity demanded of coffee.
Cross elasticity of demand = ((% change in quantity demanded of Good A) / (% change in price of Good B))
To find the cross elasticity of demand, you first need to gather data on the quantity demanded and prices of two goods, A and B, over a given time period. Then, calculate the percentage change in quantity demanded of Good A and the percentage change in price of Good B.
For example, let's say you are analyzing the cross elasticity of demand between coffee and tea. If the quantity demanded of coffee increases by 10% when the price of tea increases by 5%, you would calculate the cross elasticity of demand as follows:
Cross elasticity of demand = ((10% / 5%) = 2
This means that for every 1% increase in the price of tea, the quantity demanded of coffee increases by 2%. In this case, we would say that coffee and tea are complementary goods, as the increase in price of tea leads to an increase in the quantity demanded of coffee.