Question

Quantity demanded for tea has increased from 100 to 160 units with an increase in the price
of the coffee powder from Rs. 40 to Rs. 50. Calculate the cross elasticity of demand between
tea and coffee and explain the relationship between the goods.

Answer 1

Answer:

Initial Demand: 100

New Demand: 160

Change in Demand: 60

Percentage Change in Demand: 60/100 * 100 = 60

Initial Price: 40

New Price: 50

Change in Price: 10

Percentage Change in Price: 10/40*100 = 25

As increase in coffee powder's price has caused the demand of tea to increase, they both are substituted goods.

Ced = Percentage Change in Demand/Percentage Change in Price

Ced = 60/25 = 2.4