Question

The cross-price elasticity of demand for peanut butter with respect to the price of jelly is -0.3. a. Are they complement or substitute products? Explain your answer. (5pts.) b. If we expect the price of jelly to decline by 15%, what is the expected change in the quantity demanded for peanut butter? (Show your calculations) (10pts.)Immersive Reader (15 Points)

Answer 1

Cross - price elasticity of demand for peanut butter with respect to price of jelly is -0.3.

a) Negative cross price elasticity of demand means that goods are complements to each other.

b) If we expect price of jelly to decline by 15%

Elasticity of demand = %change in quantity demanded of peanut butter / %change in price of jelly

-0.3 = %change in quantity demanded of peanut butter / 0.15

%change in quantity demanded of peanut butter = -0.045 which is -4.5%