Question

The quantity demanded of product A has increased by 5% in response to a 10% increase in price of product B. Calculate the cross elasticity of demand. [2.5]- ​

Answer 1

What is the cross elasticity of demand?

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Cross elasticity is how much there is change in the demand of a product when there is change in the price of other product.”

Cross elasticity of product Y = %change in the demand of product Y÷ %change in the price of product X

If the CEP is positive then two of the product is substitutes.

If the price of substitutes of that car like another car brand changes there car price then the demand of car will effect. If the substitutes decreases the price it leads in decrease in the demand of the car or if they increase the price then the car demand will increase.this is because when other brand increase price people will more willing to buy that car whose price is less or unchanged. So they will shift to giving car.

If the CEP is negative then two of the product are complements.

If the price of complement product of the car like insurance, petrol etc changes it leads to effect on the demand of the car. If the price of these product decrease then the demand of car will increase and if the price of these product decrease then the demand of the car will increase. This is because people will think that they are getting more benifits.

Answer 2

Given,

Demand of product A increased $\[ = 5\% \]$

Demand of product B increased $\[ = 10\% \]$

Solution,

Calculate the cross elasticity of demand.

$\[ = \frac{{\Delta A\% }}{{\Delta B\% }}\]$

$\[ = \frac{{5\% }}{{10\% }}\]$

$\[ = + 0.5\]$

Hence the cross elasticity of demand is $\[ + 0.5\]$