When the price of pens went from $1 to $1.50, the quantity demanded of pencils changed from 50 to 75 a day. The cross-price elasticity of demand for pencils (using the initial value formula) is
A) 1.
B) 0.4.
C) 0.2.
D) -0.2.

Question

Quizplus · Accepted Answer

The cross-price elasticity of demand formula using the initial value method is: (ΔQd of good B / Qd of good B initial) / (ΔP of good A / P of good A initial). Here, ΔQd of pencils = 75 - 50 = 25, Qd initial of pencils = 50, ΔP of pens = $1.50 - $1 = $0.50, and P initial of pens = $1. Thus, the calculation is (25 / 50) / (0.50 / 1) = 0.5 / 0.5 = 1. This indicates that pencils and pens are substitutes, as the price increase in pens leads to an increase in the quantity demanded of pencils.

When the Price of Pens Went from $1 to $1