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 decreases the price of her flowers by 2 percent, you should expect which of the following?
A)a 5.2 percent decrease in the demand for your flowers
B)a 5.2 percent increase in the demand for your flowers
C)a 0.77 percent decrease in the demand for your flowers
D)a 0.77 percent increase in the demand for your flowers

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand of 2.60 indicates that for every 1% decrease in the competitor's price, the demand for your flowers decreases by 2.60%. Therefore, a 2% price decrease by the competitor leads to a 5.2% decrease in demand for your flowers (2.60 * 2%).

You Are the Manager of a Local Flower Shop and You