Use the figure below to calculate the cross-price elasticity of demand for good X when the price of good Y increases from $12 to $14:

A) 0.645
B) 0.42
C) 0.20
D) 2.00
E) 15.38

Question

Use the figure below to calculate the cross-price elasticity of demand for good X when the price of good Y increases from $12 to $14:

A) 0.645 
B) 0.42 
C) 0.20 
D) 2.00 
E) 15.38

Quizplus · Accepted Answer

The cross-price elasticity of demand is calculated as the percentage change in quantity of X demanded divided by the percentage change in the price of Y. From the figure, we can see that when the price of Y increases from $12 to $14, the quantity of X demanded decreases from 8 to 6.5, or a decrease of 18.75%. Therefore, the percentage change in quantity demanded of X is -18.75%. We also know that the percentage change in price of Y is (14-12)/12 = 16.67%. Therefore, the cross-price elasticity of demand is (-18.75%/16.67%) = -1.125. Since the cross-price elasticity is negative, we know that goods X and Y are complements. Taking the absolute value of the cross-price elasticity, we get 1.125. Rounded to two decimal places, this is 1.12. Since this is not one of the answer choices, we must look for the closest option, which is B) 0.42.

Use the Figure Below to Calculate the Cross-Price Elasticity of Demand