When the price of cookies increases from $1.50 to $2.00,the quantity demanded of milk decreases from 120 to 100 gallons.The cross-price elasticity is:
A) 11/7
B) -11/7
C) 7/11
D) -7/11
E) -9/13

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand is given by the formula:

% change in quantity demanded of milk / % change in price of cookies

Here, the % change in price of cookies is ((2-1.5)/1.5)*100 = 33.33%
And the % change in quantity demanded of milk is ((100-120)/120)*100 = -16.67%
Therefore, the cross-price elasticity of demand is:

= (-16.67%/33.33%) = -0.5
= -7/11 (after simplification)

Since the cross-price elasticity of demand is negative, we can conclude that cookies and milk are complements – meaning that when the price of cookies (a complement to milk) increases, the quantity demanded of milk (the main product) decreases.

When the Price of Cookies Increases from $1