Question

1. Create a table with a row showing initial price and quantity levels for two related products which are substitutes. You may make up any numbers that seem realistic to you, given the substitute products you select.
2. Add a second row of numbers for both products showing the effects we would see from a change in price. Keep in mind these three economic properties:
   • “All else held equal.”
   • Law of Demand
   • Rules for substitutes
3. Both products should now have two price & quantity values in your table. Show these visually by drawing a demand graph for each product. (Hint: One will show a shift along the curve and the other will show a shift of the curve itself.)
4. Calculate the cross-price elasticity between your two goods using the data in the table you've created. Show your work, proving that E_XY > 0 and they are therefore indeed substitutes.

Answer 1

	Tea			Coffee
Price	4	2		4	4
Quantity	20	30		20	10

$4 is the initial price for tea and $2 is the latter price. Now because of the change in price of tea, people consume more units of tea and less units of coffee.

Thus prices are in dollars and quantity in units.

As the tea price reduces, the quantity demanded increases, while the quantity demanded for coffee reduces.

Tea shows a shift along the curve

Coffee shows a shift in demand curve

Cross price elasticity between two goods is given by % change in quantity demanded of one good / % change in price demanded of good 2

Thus change in coffee demanded is (10-20/20) * 100 = -50%

Change in price of tea (2-4/4)*100 = -50%

Thus Ex,y = -50%/-50% = 1 thus >0

Thus they are substitutes.