When the price of sausages is $2.00 per pound, consumers buy 50 pounds of hamburger. When the price of sausages rises to $3.00 per pound, 60 pounds of hamburger are purchased. The cross price elasticity of demand between sausages and hamburger is approximately equal to
A) +0.04.
B) -0.45.
C) +2.20.
D) +0.45.

Question

Quizplus · Accepted Answer

Using the midpoint formula for cross-price elasticity of demand:

E = ((Q2 - Q1)/((Q1 + Q2)/2)) / ((P2 - P1)/((P1 + P2)/2))

Where Q1=50, Q2=60, P1=$2.00, and P2=$3.00

E = ((60-50)/((60+50)/2)) / (($3.00-$2.00)/(($3.00+$2.00)/2))

E = (10/55) / (1/2.5)

E = 0.1818 / 0.4

E = 0.4545

The cross-price elasticity of demand between sausages and hamburger is +0.45, which means that when the price of sausages increases by 1%, the quantity of hamburger demanded increases by approximately 0.45%.

When the Price of Sausages Is $2