Question

1. Suppose that when the price of corn is $2.00 a box that 200 boxes of beans are sold and when the price of corn is $4.00 a box that 300 boxes of beans are sold, ceteris paribus. Calculate the relevant elasticity and interpret.

Answer 1

Formula:

Cross Price elasticity of Beans is given by:

Ec = (% change in quantity demand of good X) /(% change in Price of good Y)

Here, % change in quantity demand of good X = % change in quantity demand of beans = ((300 - 200)/200)*100 = 50%

% change in Price of good X = % change in Price of Corn ((4 -2)/2)*100 = 100%

Hence, Cross Price elasticity of Beans = 50/100 = 0.5

Hence This elasticity is interpreted as follows:

Increase in price of corn by 1% will result in increase in demand of Beans by 0.5%. Hence This implies that Beans and Corn are Substitute goods because increase in price of one results in quantity demand of other.