Suppose computer prices at an office supply store fall from $1,000 to $900 and as a result the quantity demanded of typewriters decreases from 40 to 20 per month.The cross-price elasticity of demand is closest to
A)0.16.
B)0.2.
C)5.0.
D)6.3.

Question

Quizplus · Accepted Answer

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

Using this formula, we can find the % change in price of computers:

(1000-900)/1000 = 0.1 or 10% decrease in price

And the % change in quantity demanded of typewriters:

(40-20)/40 = 0.5 or 50% decrease in quantity

Plugging these values into the formula for cross-price elasticity, we get:

0.5 / 0.1 = 5

Therefore, the cross-price elasticity of demand is 5, which is closest to answer choice D.

Suppose Computer Prices at an Office Supply Store Fall from $1,000