When the price of margarine is $2 per pound,10 pounds of butter are demanded.When the price of margarine increases to $6 per pound,30 pounds of butter are demanded.What is the cross-price elasticity between the two goods?
A) −1
B) 1
C) 2
D) 5

Question

Quizplus · Accepted Answer

Cross-price elasticity of demand is calculated as the percentage change in quantity demanded of one good divided by the percentage change in price of another good.

Using the given information: 
- Price of margarine increases from $2 to $6 per pound = a 200% increase 
- Quantity demanded of butter increases from 10 to 30 pounds = a 200% increase

Therefore, cross-price elasticity = (200%/200%) = 1.

Since the quantity demanded of butter is directly proportional to the price of margarine, the cross-price elasticity is positive, indicating that the two goods are substitutes. Choice B is the correct answer.

When the Price of Margarine Is $2 Per Pound,10 Pounds