The demand for fax machines has been estimated to be Q = 1,000 - P + 40L,where P is the price of the machines and L is the average cost of a 10-minute midday call from Los Angeles to New York.At a fax machine price of $400 and a phone call cost of $10,the cross-price elasticity of demand for fax machines with respect to the price of phone service is:
A) 0.4.
B) 2.5.
C) -0.25.
D) 4.0.
E) 4.25.

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand is calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. In this case, we're looking at the change in demand for fax machines (Q) based on the change in the cost of a phone call (L). The formula for the demand given is Q = 1,000 - P + 40L. When L increases by $1 (from $10 to $11), the change in Q can be calculated by substituting L in the equation: - Initial Q = 1,000 - 400 + 40*10 = 1,000 - 400 + 400 = 1,000.- New Q with L = 11: Q = 1,000 - 400 + 40*11 = 1,000 - 400 + 440 = 1,040.The change in Q is 40 (from 1,000 to 1,040), and the percentage change in Q is 40/1,000 = 0.04 or 4%. The change in L is $1, from $10 to $11, which is a 10% increase (1/10). Therefore, the cross-price elasticity of demand is the percentage change in Q divided by the percentage change in L, which is 4%/10% = 0.4.

The Demand for Fax Machines Has Been Estimated to Be