Question

suppose that 12 percent rise in the price of pancakes decreases the quantity of pancakes demanded by 22 percent and increase the quantity of waffles demanded by 14 percent.
calculate: price elasticity of demand for pancakes
cross elasticity of demand for waffles with respect to the price pancakes

Answer 1

Answer:

The price elasticity of demand for pancakes is -1.83.

The cross elasticity of demand for waffles with respect to the price pancakes is 1.16.

Explanation:

Price elasticity of demand measures the degree of change in the quantity demanded of a product due to a change in its price.  

While the cross-price elasticity measures the change in the quantity demanded of a product due to change in the price of a related product.  

A 12% increase in the price of pancakes is causing its quantity demanded to decrease by 22%.  

The price elasticity of demand for pancakes

= $\frac{\% \Delta Qx}{\% \Delta P}$

= $\frac{-22}{12}$

= -1.83

A 12% increase in the price of pancakes is causing quantity demanded of waffles to increase by 14%.  

The cross price elasticity of demand for waffles

=  $\frac{\% \Delta Qy}{\% \Delta P}$

= $\frac{14}{12}$

= 1.16

The positive cross price elasticity implies that waffles are a substitute for pancakes.