Question

Suppose that as the price of comic books goes up from $3 to $5 the number of concert tickets demanded increases from 400 to 500.
a. What is the cross price elasticity of demand at price $3?
b. Are these two goods compliments or substitutes?

Answer 1

Answer
cross price elasticity of demand=(change in quantity/average quantity)/(change in price/average price)
Change in quantity=500-400=100
average quantity=(500+400)/2=450
change in price=5-3=2
Average price=(5+3)/2=4

cross price elasticity of demand=(100/450)/(2/4)
=0.44

cross price elasticity of demand is 0.44
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b)
Subsitutes
The two goods are substitutes as the increase in the price of one increases the quantity of other means the consumers are substituting from one to other.
A positive cross price elasticity means goods are a substitute and a negative means complements.