The price of coffee rose 40 percent and the quantity of coffee demanded fell by 20 percent.The quantity of doughnuts demanded also fell by 20 percent.From this information,we can conclude that
A) the demand for coffee is elastic.
B) the demand for coffee is unit elastic.
C) coffee is an inferior good.
D) the cross elasticity demand between coffee and doughnuts is -0.5.
E) the income elasticity of demand for coffee is 2.

Question

Quizplus · Accepted Answer

The cross elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. Since the quantity of doughnuts demanded fell by 20% when the price of coffee rose by 40%, the cross elasticity of demand is calculated as -20%/40% = -0.5.

The Price of Coffee Rose 40 Percent and the Quantity