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?
Answers
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.