Question

If a 12% increase in the price of grapefruit juice causes a 22% decrease in the demanded amount of grapefruit juice. On the other hand, there is a 14% increase in the amount of demand for Ron Don Q; calculate: a) the price elasticity of the demand for grapefruit juice and rum. b) Calculate the cross elasticity of demand between grapefruit juice and Don Q Rum.

Answer 1

Solution:

(a) Price elasticity of demand for grapefruit juice and rum

Price elasticity of demand = % change in the quantity demanded / % change in the price

Price elasticity of demand for grapefruit juice:

= -22/12

=-1.83

Note: Since demand decreases by 22% it should mentioned in negative sign.

Price elasticity of demand for rum:

= 14/12

= 1.167

(b) Cross elasticity of demand between grapefruit juice and Don Q Rum:

=% change in quantity demanded of Don Q Rum/ % change on price of grapefruit juice

= 14%/12%

= 1.167