When the price of cheese increases by $20 \%$, the quantity demanded of sausage decreases by $40 \%$.

What is the cross-price elasticity of demand for sausage and cheese?

Choose 1 answer:
(A) 0.2
(B) 2
(c) 0.5
(D) -0.5
(E) -2

Question

When the price of cheese increases by $20 \%$, the quantity demanded of sausage decreases by $40 \%$.

What is the cross-price elasticity of demand for sausage and cheese?

Choose 1 answer:
(A) 0.2
(B) 2
(c) 0.5
(D) -0.5
(E) -2

Accepted Answer

∻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 ⋮ Calculation: Given that the price of cheese increases by $20\%$ and the quantity demanded of sausage decreases by $40\%$, we can substitute these values into the formula: $$ E_{xy} = \frac{-40\%}{20\%} = -2 $$ ‖ ∻Answer∻ ⚹ (E) -2 ⚹ ∻Key Concept∻ ⚹ Cross-Price Elasticity of Demand ⚹ ∻Explanation∻ ⚹ The cross-price elasticity of demand between sausage and cheese is -2, indicating that they are complementary goods. When the price of cheese increases, the quantity demanded of sausage decreases significantly. ⚹◊What is the formula for calculating the cross-price elasticity of demand between two goods⍭ Generate me a similar question◊

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