Question

5. 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.

6. Calculate the cross-price elasticity of demand for maple syrup with respect to pancakes.  (Points: 5)

7. Provide the correct formula

8. Show the procedure

12. State the correct answer, including correct sign and magnitude

11. Interpret your elasticity value.  (Points: 5)

12. Are pancakes a substitute or complementary good?  (Points: 4)

Answer 1

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.