Question

Microeconomics

Posted 6 months ago

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The cross-price elasticity of demand for coffee made at home in response to changes in the prices of four different products is given in the table below:
\begin{tabular}{ll}
Other good & Value of cross-price elasticity when the price of the other good changes \\
\hline Product A & -50 \\
Product B & $-\infty$ \\
Product C & $\infty$ \\
Product D & 0.5 \\
Product E & 0
\end{tabular}
Which good is the most substitutable for coffee made at home?
Choose 1 answer:
(A) Product A
(B) Product $B$
(C) Product C
```

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Answer from Sia

Posted 6 months ago

Solution

a

Definition of Cross-Price Elasticity: Cross-price 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 formula:
$E_{xy} = \frac{\% \Delta Q_x}{\% \Delta P_y}$

b

Analysis of Values: The table provides the cross-price elasticity values for different products when the price of another good changes. The values are:
- Product A: -50
- Product B: $-\infty$
- Product C: $\infty$
- Product D: 0.5
- Product E: 0

c

Interpretation: A positive cross-price elasticity indicates that the goods are substitutes, while a negative value indicates that they are complements. The higher the positive value, the stronger the substitutability

d

Conclusion: Product C has the highest positive cross-price elasticity ($\infty$), indicating it is the most substitutable for coffee made at home

Answer

(C) Product C

Key Concept

Cross-price elasticity of demand

Explanation

Cross-price elasticity measures how the quantity demanded of one good responds to a price change in another good. A higher positive value indicates stronger substitutability.

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