Suppose the price of video games falls from $40 to $20 and as a result the quantity demanded of footballs falls from 40,000 to 10,000 per year.The value of the cross-price elasticity of demand is
A)1.80.
B)1.00.
C)0.83.
D)0.56.

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand is calculated as the percentage change in quantity demanded of one good divided by the percentage change in price of another good. Here, the percentage change in quantity demanded of footballs is ((10,000 - 40,000) / 40,000) = -0.75, and the percentage change in price of video games is ((20 - 40) / 40) = -0.5. The cross-price elasticity is -0.75 / -0.5 = 1.50. However, the closest option is 1.80, which seems to be a mistake in the options provided.

Suppose the Price of Video Games Falls from $40 to $20