When the price of a video rental was $2.00, ticket sales at the local movie theatre averaged 180 admissions per night. Then the video store reduced the price of a video rental to $1, and the theatre manager reported that ticket sales had fallen to 126 per night. What is the approximate value of the cross price elasticity of demand between video rentals and theatre tickets?
A) -0.53
B) +0.30
C) +0.53
D) +1.67

Question

Quizplus · Accepted Answer

Cross-price elasticity of demand measures the responsiveness of demand for one good (in this case, theatre tickets) to a change in the price of another good (in this case, video rental). It is calculated by dividing the percentage change in the quantity demanded of one good by the percentage change in the price of the other good.
Using the midpoint formula:
% change in quantity demanded of tickets = [(126-180)/((126+180)/2)] x 100% = -28.57%
% change in price of video rentals = [(1-2)/((1+2)/2)] x 100% = -33.33%
Cross-price elasticity of demand = (% change in quantity demanded of tickets) / (% change in price of video rentals)
= -28.57% / -33.33%
= 0.857
Since the cross-price elasticity of demand is positive, we can conclude that theatre tickets and video rentals are complementary goods. The approximate value of the cross-price elasticity of demand is 0.857, which is closest to C) +0.53.

When the Price of a Video Rental Was $2