Question

Consumer buys 10 units of Good A when the price of Good B is $5. When the price of Good B rises to $6 (the price of Good A remaining unchanged) the consumer buys 14 units of Good A.

Part A

Using an appropriate formula, calculate this Consumer’s cross Elasticity of demand for Good A. Show your working.

Part B

Is Good A, a substitute for, or a complement to, Good B? Explain your reasoning.

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Answer 1

Part A. Qx=10

Py=5

ΔPy=1

ΔQx=4

Cross elasticity of demand= (ΔQx/ΔPy) * (Py/Qx)

=4/1 * 5/10

=4* 1/2

=2

Part B. Good A is a substitute of Good B since when the price of good B rises, the quantity demanded of good A rises.