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

Question

Quizplus · Accepted Answer

The cross price elasticity of demand is calculated as the percentage change in the quantity demanded of one good (in this case, fish) divided by the percentage change in the price of another good (in this case, sausages). The formula is: $$E_{p} = \frac{\%\ change\ in\ quantity\ demanded\ of\ good\ 1}{\%\ change\ in\ price\ of\ good\ 2}$$Here, the quantity demanded of fish increases from 50 to 60 pounds, which is a 20% increase $\left(\frac{60-50}{50} \times 100\right)$. The price of sausages increases from $2.00 to $3.00, which is a 50% increase $\left(\frac{3-2}{2} \times 100\right)$. Thus, the cross price elasticity of demand is:$$E_{p} = \frac{20\%}{50\%} = 0.4$$This indicates that fish and sausages are substitutes, as the increase in the price of sausages leads to an increase in the quantity demanded of fish. The correct answer is +0.45, which is closest to our calculated value.

When the Price of Sausages Is $2