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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

The demand for apples will decrease.

Step by step solution

01

Step 1. Introduction:

The percentage fluctuation in the quantity demanded of a commodity divided by the percentage variation in the price of other commodity is the cross-price elasticity of demand.

02

Step 2. Solution:

The formula used to compute the cross-price elasticity of apples is given below:

Cross-priceelasticityofapples=%changeindemandforapples%changeinpriceoforanges

The cross price elasticity of apples is 0.4 and change in price of oranges is -3% (as the price has decreased). Substituting the values, we get:

0.4=%changeindemandforapples-3%

%changeindemandforapples=0.4×-3%=-1.2%

Thus, the demand for apple changes by -1.2%

03

Step 3. Conclusion:

As the % change in demand for apples is a negative number, it means the demand for apples will decrease by 1.2%.

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