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Q1: If a 10 percent rise in the price of coffee increases the quantity of tea...

Q1: If a 10 percent rise in the price of coffee increases the quantity of tea demanded by 25 percent and decreases the quantity of coffee demanded by 20 percent,

Calculate price elasticity of coffee

Q2:

Calculate the cross-elasticity of demand between coffee and tea.

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Answer #1

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part A

price elasticity of coffee= Percentage change in demand of coffee/ percentage change in price of coffee

price elasticity of coffee= (-) 20%/ 10%

= (-)2

Absolute value is 2

price elasticity of coffeeis 2 .It represents price elasticity of coffee is more elastic.

Part B)

cross-elasticity of demand between coffee and tea=Percentage change in demand of tea/ percentage change in price of coffee

=25%/ 10%

cross-elasticity of demand between coffee and tea=2.5

cross-elasticity of demand between coffee and tea=2.5.

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