What is the formula for the cross-price elasticity of demand?

The cross-price elasticity of demand (CPED) is used to determine how the quantity demanded of one product will change in response to a change in the price of another product. Goods can either be substitutes or complements. In the case of substitute goods, a price increase in one product will cause an increase in the quantity demanded for the other product. For complementary goods, a price increase in one product will cause a decrease in the quantity demanded for the other product.

The formula for the cross-price elasticity of demand is: \(CPED = \frac{\% \, Change \,In\, Quantity\, Demanded\, of\, Good\, X}{\% \,Change\, In \,Price\, of\, Good\, Y}\) This formula can be rewritten as: \(CPED = \frac{(QD_X2 - QD_X1) / QD_X1}{(P_Y2 - P_Y1) / P_Y1}\) Where: - \(QD_X1\) and \(QD_X2\) are the initial and final quantities demanded of Good X - \(P_Y1\) and \(P_Y2\) are the initial and final prices of Good Y

To calculate the cross-price elasticity of demand, you should follow these steps: 1. Obtain the initial and final quantities demanded for Good X (\(QD_X1\) and \(QD_X2\)) 2. Obtain the initial and final prices for Good Y (\(P_Y1\) and \(P_Y2\)) 3. Calculate the percentage change in the quantity demanded of Good X: \(\frac{(QD_X2 - QD_X1)}{QD_X1}\) 4. Calculate the percentage change in the price of Good Y: \(\frac{(P_Y2 - P_Y1)}{P_Y1}\) 5. Divide the percentage change in the quantity demanded of Good X by the percentage change in the price of Good Y. The result will be the cross-price elasticity of demand, which will help you understand the relationship between the two goods. If the CPED is positive, the goods are substitutes. If the CPED is negative, the goods are complements. If the CPED is close to zero, the goods are independent of each other.