The price of apples at a local market rises from $2.95 to $3.05 per kilogram,and as a result the quantity of oranges that households purchase increases from 3950 to 4050 kilograms per week.The cross-price elasticity is
A)-1.33.
B)-0.75.
C)0.75.
D)1.33.
E)1.5.

Question

Quizplus · Accepted Answer

Cross-price elasticity measures the responsiveness of the demand for one good to a change in the price of another good. In this case, we are given the percentage change in the price of apples and the resulting percentage change in the quantity of oranges purchased.

Using the formula for cross-price elasticity:

% change in quantity of oranges / % change in price of apples

We can calculate:

% change in quantity of oranges = [(4050-3950)/((4050+3950)/2)] x 100% = 2.53%

% change in price of apples = [(3.05-2.95)/((3.05+2.95)/2)] x 100% = 1.67%

Cross-price elasticity = 2.53% / (-1.67%) = -0.75

The negative sign indicates that oranges are a substitute for apples (when the price of apples went up, people bought more oranges instead). The magnitude of -0.75 indicates that the relationship is moderately strong (elasticity values between 0.5 and 1.5 are generally considered moderately elastic). Therefore, the correct choice is C) 0.75.

The Price of Apples at a Local Market Rises from $2.95