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Chapter 6: Problem 16

According to data from the U.S. Department of Energy, sales of the fuel- efficient Toyota Prius hybrid fell from 158,574 vehicles sold in 2008 to 139,682 in \(2009 .\) Over the same period, according to data from the U.S. Energy Information Administration, the average price of regular gasoline fell from \(\$ 3.27\) to \(\$ 2.35\) per gallon. Using the midpoint method, calculate the cross-price elasticity of demand between Toyota Prii (the official plural of "Prius" is "Prii") and regular gasoline. According to your estimate of the cross-price elasticity, are the two goods complements or substitutes? Does your answer make sense?

Short Answer

Expert verified
Question: Calculate the cross-price elasticity of demand between Toyota Prius and gasoline from 2008 to 2009, and determine whether they are complements or substitutes. Answer: The cross-price elasticity of demand between Toyota Prius and gasoline from 2008 to 2009 is -0.93, indicating that they are complements.

Step by step solution

01

Understanding cross-price elasticity of demand

Cross-price elasticity of demand measures the responsiveness of the demand for one good to a change in the price of another good. It is calculated using the following formula: Cross-price elasticity of demand = (% change in quantity demanded of Good A) / (% change in price of Good B)
02

Calculate the percentage changes

Calculate the percentage change in quantity demanded of Toyota Prii and the percentage change in the price of gasoline Initial quantity of Toyota Prii sold in 2008 (Q1): 158,574 Final quantity of Toyota Prii sold in 2009 (Q2): 139,682 Initial price of gasoline in 2008 (P1): $3.27 Final price of gasoline in 2009 (P2): $2.35 Percentage change in quantity demanded of Toyota Prii = ((Q2 - Q1) / ((Q1 + Q2) / 2)) * 100 Percentage change in price of gasoline = ((P2 - P1) / ((P1 + P2) / 2)) * 100
03

Calculate the cross-price elasticity of demand

Substitute the values in the formula above for cross-price elasticity of demand: Cross-price elasticity of demand = (Percentage change in quantity demanded of Toyota Prii) / (Percentage change in price of gasoline)
04

Determine whether the goods are complements or substitutes

If the cross-price elasticity of demand is positive, the goods are substitutes. If it is negative, the goods are complements. Based on the calculated cross-price elasticity, determine whether Toyota Prii and gasoline are complements or substitutes.
05

Does the answer make sense?

Analyze if the answer makes sense based on the nature of the goods and consumer behavior.

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Most popular questions from this chapter

A recent report by the U.S. Centers for Disease Control and Prevention (CDC), published in the CDC's Morbidity and Mortality Weekly Report, studied the effect of an increase in the price of beer on the incidence of new cases of sexually transmitted disease in young adults. In particular, the researchers analyzed the responsiveness of gonorrhea cases to a tax-induced increase in the price of beer. The report concluded that "the.... analysis suggested that a beer tax increase of \(\$ 0.20\) per six-pack could reduce overall gonorrhea rates by \(8.9 \% . "\) Assume that a sixpack costs \(\$ 5.90\) before the price increase. Use the midpoint method to determine the percent increase in the price of a six-pack, and then calculate the cross-price elasticity of demand between beer and incidence of gonorrhea. According to your estimate of this cross-price elasticity of demand, are beer and gonorrhea complements or substitutes?

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