Question

Suppose the cross-price elasticity of demand between goods X and Y is 5. How much would the price of good Y have to change in order to change the consumption of good X by 20 percent? percent

Answer 1

Cross price elasticity of demand suggests us the percentage change in quantity demanded for each 1 percent change in price of other related goods. Given that cross price elasticity of demand for spiral notebooks is between goods X and Y is 5. This implies ec = 5

Now ec = % change in consumption (quantity demanded) of X / % change in price of Y

We are given that the % change the consumption of good X = 20 percent. Hence we see that

5 = 20%/% change in price of Y

% change in price of Y = 20%/5 = 4%

Hence the price of good Y have to change by 4%.