Tacos and pizza are substitutes.If a 2 percent change in the price of a taco leads to a 4 percent change in the demand for pizza,the cross elasticity of demand equals
A) -1/2.
B) 1/2.
C) 2.
D) -2.
E) 4.

Question

Quizplus · Accepted Answer

The cross elasticity of demand measures the responsiveness of the demand for one good to a change in the price of another good. In this case, we know that tacos and pizza are substitutes (i.e. when the price of tacos goes up, people will likely switch to pizza instead). We also know that a 2% change in taco price leads to a 4% change in pizza demand.

Therefore, in terms of the formula for cross elasticity of demand (percentage change in quantity demanded of pizza divided by percentage change in the price of tacos), we can plug in the values we know:

Cross elasticity of demand = percentage change in quantity demanded of pizza / percentage change in price of tacos
Cross elasticity of demand = 4% / 2%
Cross elasticity of demand = 2

Since the cross elasticity of demand is greater than 0, we know that tacos and pizza are substitutes. And since the cross elasticity is greater than 1, we know that they are highly substitutable. Therefore, the answer is C) 2.

Tacos and Pizza Are Substitutes