Question

urgent! The coefficient of the price of Coffee Mate in the regression of the quantity demanded of Nescafé (in millions of units) on the price of Coffee Mate and other variables is -16. What would be the cross elasticity of demand between Nescafé and Coffee Mate if sales of Nescafé declined from 8 to 5.5 with an increase in the Coffee Mate price from $1 to $1.30? (10pts)

Answer 1

Cross price elasticity of demand is calculated as: %change in quantity demanded of Nescafe / %change in price of Coffee Mate

Sales of Nescafe falls from 8 to 5.5 while price of Coffee Mate rises fom $1 to $1.3

%change in quantity demanded of Nescafe = [(5.5 - 8) / 8] * 100 = -31.25%

%change in price of Coffee Mate = [(1.3 - 1) / 1] * 100 = 30%

Cross price elasticity of demand = -31.25% / 30% = -1.04

Negative cross price elasticity of demand means that goods are complemented to each other.