Question

Given the following examples determine and explain which types of elasticity of demand you are able to calculate, and then calculate using the formulas given in the textbook. After calculating, please interpret the calculations.

4.) Consider the markets for widgets and cogs. You study survey data and observe that if widgets cost $5, then 100 widgets are demanded. You also observe that if widgets cost $3, then 150 cogs are demanded and if widgets cost $4 then 100 cogs are demanded. (5 points)

Answer 1

Two products are W and C

Types:

Cross elasticity of demand (Ec) between W and C could be done.

Calculation:

Ec = Percentage change in QD of C / Percentage change in price of W

      = {(100 – 150) / 150} / {(4 – 3) / 3}

      = (- 50/150) / (1/3)

      = - 1

Interpretation:

Cross elasticity of demand is (- 1).

Since it is negative, the goods W and C are complementary goods to each other.

This happens because the increasing price of W decreases the demand of W, and decreases the quantity demanded of C as well. It indicates that both these goods are related and complements.

Note: the price of W ($5) and its quantity demanded of 100 units are not relevant here.