You are the manager of a local flower shop and you compete with one other flower shop in your area. You estimate the cross- price elasticity of demand between your flowers and your competitor's flowers to be 2.60. If your competitor increases the price of her flowers by 4 percent, you should expect which of the following?
A)a 1.54 percent decrease in the demand for your flowers
B)a 1.54 percent increase in the demand for your flowers
C)a 10.4 percent decrease in the demand for your flowers
D)a 10.4 percent increase in the demand for your flowers

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand is 2.60, which means that for every 1% increase in the competitor's price, the demand for your flowers increases by 2.60%. Therefore, a 4% increase in the competitor's price would lead to a 10.4% increase in the demand for your flowers (2.60 * 4% = 10.4%).

You Are the Manager of a Local Flower Shop and You