Question

Microeconomics

Posted 4 months ago

```
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
```

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Answer from Sia

Posted 4 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

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.

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