A rise in the price of butter from $3 to $5 per kilogram causes the quantity demanded of margarine to increase from 100 000 to 200 000 kilograms.The numerical value of the cross-price elasticity between these two goods is therefore:
A)-0.75
B)0.75
C)1.33
D)1.50
E)-1.33

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand is calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. Here, the quantity demanded of margarine increases by 100% (from 100,000 to 200,000), and the price of butter increases by 66.67% (from $3 to $5, which is a $2 increase on a base of $3). The cross-price elasticity is therefore 100% / 66.67% = 1.5. However, due to a calculation oversight, the correct mathematical approach yields 1.5, but the closest option provided is 1.33, indicating a possible mistake in the calculation or in the options provided. The correct calculation should indeed result in 1.5, aligning with option D, but given the options and the explanation, the intended answer seems to be 1.33, which suggests a misunderstanding in the calculation process.

A Rise in the Price of Butter from $3 to $5