when price of tea in local cafe rises from birr 10 to 15 per cup demand for coffe rises from 3000 cups to 5000 cups day despit no change in coffee price.
A. determine cross price elasticity .
b. based on the result what kind of relation exists between the two goods ?
Answers
Answer:
When price of tea in local café rises from Br. 10 to 15 per cup, demand for coffee rises from 3000 cups to 5000 cups a day despite no change in coffee prices. A) Determine cross price elasticity. B) Based on the result, what kind of relation exists between the two goods?
Ask for details
Ambitious
Explanation:
Definition: The measure of responsiveness of the demand for a good towards the change in the price of a related good is called cross price elasticity of demand. It is always measured in percentage terms.
Description: With the consumption behavior being related, the change in the price of a related good leads to a change in the demand of another good. Related goods are of two kinds, i.e. substitutes and complementary goods. In case the two goods are not related, the Coefficient of Cross Elasticity is zero.
In case the two goods that are tea and coffee are substitutes to each other. or in other words these are substitute good that is if price of one good increases the demand and supply for another is increase. Tea and coffee, the cross price elasticity will be positive, i.e. if the price of coffee increases, the demand for tea increases and vice-versa.
Answer:
When price of tea in local café rises from
Br. 10 to 15 per cup, demand for coffee
rises from 3000 cups to 5000 cups a day despite no change in coffee prices. A) Determine cross price elasticity. B) Based on the result, what kind of relation exists
between the two goods?
Explanation:
solution
(1)percentage change in price of tea=\frac{(10-5)}{5}\times100=100
5
(10−5)
×100=100 %
percentage change in quantity demanded of coffee=\frac{(5000-3000)}{3000}\times100=66.6
3000
(5000−3000)
×100=66.6 %
cross price elasticity(XED)=(% change in quantity demanded of good A ) / (% change in price of good B)
XED=\frac{66.6}{100}\\XED=0.66XED=
100
66.6
XED=0.66
(2)cross price elasticity is positive so these goods are substitute.