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) -0.5
(B) -2
(C) 2
(D) 0.5
(E) 0.2

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) -0.5
(B) -2
(C) 2
(D) 0.5
(E) 0.2

Accepted Answer

∻Solution∻ ‖ a ⋮ Cross-Price Elasticity of Demand Formula: The cross-price elasticity of demand measures the responsiveness of the quantity demanded for a good to a change in the price of another good. It is calculated using the formula: $E_{xy} = \frac{\% \Delta QD_x}{\% \Delta P_y}$, where $E_{xy}$ is the cross-price elasticity of demand between goods x and y, $\% \Delta QD_x$ is the percentage change in quantity demanded of good x, and $\% \Delta P_y$ is the percentage change in price of good y. ‖ ‖ b ⋮ Calculation: Given that the price of cheese (good y) increases by 20% ($\% \Delta P_y = 20\%$) and the quantity demanded of sausage (good x) decreases by 40% ($\% \Delta QD_x = -40\%$), we can substitute these values into the formula to find the cross-price elasticity of demand: $E_{xy} = \frac{-40\%}{20\%} = -2$. ‖ ∻Answer∻ ⚹ -2 ⚹ ∻Key Concept∻ ⚹ Cross-Price Elasticity of Demand ⚹ ∻Explanation∻ ⚹ The cross-price elasticity of demand for sausage and cheese is -2, indicating that sausage and cheese are complements, as the quantity demanded of sausage decreases when the price of cheese increases. ⚹◊What formula can be used to calculate the cross-price elasticity of demand for sausage and cheese?⍭ Generate me a similar question◊

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