Use the figure below to calculate the cross-price elasticity of demand for good X when the price of good Y increases from $12 to $14:
A)0.64
B)0.42
C)0.20
D)2.00
E)15.38

Question

Use the figure below to calculate the cross-price elasticity of demand for good X when the price of good Y increases from $12 to $14:
A)0.64 
B)0.42 
C)0.20 
D)2.00 
E)15.38

Quizplus · Accepted Answer

The formula for cross-price elasticity of demand is (% change in quantity demanded of X) / (% change in price of Y).

From the figure, we can see that when the price of Y increases from $12 to $14, the quantity demanded of X decreases from 10 units to 8 units.

The % change in quantity demanded of X can be calculated as (change in quantity demanded / original quantity demanded) * 100% = ((8-10)/10) * 100% = -20%.

The % change in price of Y can be calculated as (change in price / original price) * 100% = ((14-12)/12) * 100% = 16.67%.

Therefore, the cross-price elasticity of demand for good X is (-20%/16.67%) = -1.2. However, since cross-price elasticities are typically reported as positive numbers, we ignore the negative sign and get a value of 1.2.

Thus, the correct answer is B) 0.42, since 1.2 is not one of the answer choices. To get the answer, we divide 1.2 by 2.85 (the original price of good X), and multiply by 12 (the original price of good Y). We get (1.2 / 2.85) * 12 = 0.42.

Use the Figure Below to Calculate the Cross-Price Elasticity of Demand