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Chapter 5: Q.9 (page 130)

Suppose the cross-price elasticity of apples with respect to the price of oranges is 0.4, and the price of oranges falls by 3%. What will happen to the demand for apples?

Short Answer

Expert verified

Apple demand has dropped by 1.2 percent.

Step by step solution

01

Definition

Cross price elasticity:

The cross elasticity of demand is an economic term that assesses how responsive one good's demand is when the price of another commodity varies.

02

Explanation

The formula for cross-price elasticity is

%changeinQdforapples/%changeinPoforanges

When both sides are multiplied by the percent change in P for oranges, the result is the percent change in Qd for apples = cross-price elasticity X% change in P of oranges = 0.4×(–3%)=–1.2%,ora1.2%decrease in demand for apples.

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