Question

the price of one kg tea is rs 30.at this price 5 kg tea is demanded. if the price of cofee rises from 25 to 30 per kg. the demand of tea rises by 5 to 8 kg . the cross elasticity of tea is?
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Answer 1

Answer:

240

The price of one kg tea is 30

At this price you want 5kg

But your demand increased 5kg to 8 kg

So 8kg at the 30 rs price

240

Answer 2

Answer:

The cross elasticity of tea is +1.5

Explanation:

The cross elasticity of demand assesses how responsive a quantity desired of one commodity is to changes in the price of another good. The percentage change in the amount requested for one commodity is divided by the percentage change in the price of the other good to arrive at this measurement.

Here, let 'x' stand for tea

and 'y' stand for coffee

Therefore, symbolically,

Cross elasticity ($E_{c}$) = $\frac{\Delta q_{x} }{\delta p_{y} }$× $\frac{p_{y} }{q_{x} }$

where,

$p_{y}$ is the real price of good 'y'

$q_{x}$ is the real price of good 'x'

$\Delta p_{y}$ is the small change in the price of 'y'

$\Delta q_{x}$ is the small change in the price of 'x'

∴ $E_{c}$  =  $\frac{5-8}{-10}$ × $\frac{25}{5}$

⇒ $E_{c}$ = $\frac{-3}{-10}$ ×$\frac{25}{5}$

⇒ $E_{c}$ = + 1.5

As a result, the elasticity demand for tea is +1.5, indicating that tea demand is more elastic than coffee demand.

A positive sign indicates that coffee and tea are substitute goods.