As the price of pancakes decreased from $3 to $1 during winter, the quantity demanded for maple syrup increased from 2 oz. to 3 oz.
Calculate the cross-price elasticity of demand for maple syrup with respect to pancakes. (Points: 5)
Provide the correct formula
Show the procedure
State the correct answer, including correct sign and magnitude
Interpret your elasticity value. (Points: 5)
Are pancakes a substitute or complementary good? (Points: 4)
Cross price elasticity = % change in quantity demanded of Good B / % change in price of good A.
% change in quantity demand of maple syrup = [ ( 3- 2) / [ 3+2) / 2) ] = 1 / 2.5 = 0.4
% change in price of pancakes = (1-3) / [(1+3) / 2 ] = -1
Cross price elasticity = % change in quantity demand of maple syrup / % change in price of pancakes
cross price elasticity = 0.4 / -1 = -0.4
so , pancakes and Syrup are complementary goods since the value of cross price elasticity of demand is negative.
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