Question

Macroeconomics

Posted 4 months ago

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Eric wants to calculate how responsive the quantity of football tickets $(F B)$ are to the price of airline tickets $(A T)$. He used the following formula, but he made a mistake in his calculations.
$\frac{\% \Delta Q_{A T}}{\% \Delta P_{F B}}$
What is the mistake he made in this formula?
Choose 1 answer:
(A) He is calculating how the quantity demanded of airline ticket responds to a change in price of football tickets instead.
(B) $\mathrm{He}$ is calculating the price elasticity of demand for football tickets.
(c) He is calculating the price elasticity of demand for airline tickets.
(D) $\mathrm{He}$ is calculating the income elasticity of demand for airline tickets instead.
(E) He has reversed the numerator and the denominator.
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Answer from Sia

Posted 4 months ago

Solution

a

Understanding Cross-Price Elasticity of Demand: Cross-price elasticity of demand measures the responsiveness of the quantity demanded for one good to a change in the price of another good. It is calculated using the formula: ⚹ $E_{xy} = \frac{\% \Delta Q_x}{\% \Delta P_y}$ ⚹, where $E_{xy}$ is the cross-price elasticity of demand, $Q_x$ is the quantity of good x, and $P_y$ is the price of good y

b

Identifying the Mistake: Eric wants to calculate how responsive the quantity of football tickets ($FB$) are to the price of airline tickets ($AT$). The correct formula should have the percentage change in the quantity of football tickets in the numerator and the percentage change in the price of airline tickets in the denominator. Therefore, the formula should be: ⚹ $\frac{\% \Delta Q_{FB}}{\% \Delta P_{AT}}$ ⚹

c

Analyzing the Options: The mistake Eric made is that he reversed the numerator and the denominator in the formula. The correct formula for cross-price elasticity of demand should have the percentage change in quantity of the product of interest (football tickets) in the numerator and the percentage change in price of the other product (airline tickets) in the denominator

Answer

(E) He has reversed the numerator and the denominator.

Key Concept

Cross-Price Elasticity of Demand

Explanation

Cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good, and the formula requires the percentage change in quantity of the good of interest in the numerator and the percentage change in price of the other good in the denominator. Eric reversed these in his calculation.

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