Sales of shampoo by Clean-Hair, Inc. have recently decreased from 1,300 to 1,100 units in response to a price decrease from $7 to $5 by its main competitor. Assuming that everything else is being held constant, we can infer that:
| Instructor Explanation: | The answer can be found by using the midpoints formula: |
Question 1 options:
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the cross-price ARC-elasticity (midpoints formula) between the two products is ½. |
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the cross-price ARC-elasticity (midpoints formula) between the two products is -½. |
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the cross-price ARC-elasticity (midpoints formula) between the two products is -2. |
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the cross-price ARC-elasticity (midpoints formula) between the two products is 2. |
| Price | Quantity Demanded |
| $7 | 1300 |
| $5 | 1100 |
Cross Price Elasticity of Demand = % change in Quantity Demand / % change in price
% change in Quantity Demand = Q2 - Q1 / (Q2+Q1/2) x 100
% change in Quantity Demand = 1100 - 1300 / (1100+1300/2) x 100
% change in Quantity Demand = -200 / (1200) x 100
% change in Quantity Demand = -16.66
% change in price = P2 - P1 / (P2+P1/2) x 100
% change in price = 5 - 7 / (5+7/2) x 100
% change in price = -2 / (6) x 100
% change in price = -33.33
Cross Price Elasticity of Demand = % change in Quantity Demand / % change in price
Cross Price Elasticity of Demand = -16.66 / -33.33
Cross Price Elasticity of Demand = 0.50
Hence 1st option is correct
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