Question

1. When the price of gas increased 5%, Chidi increased the number of bus tickets he purchased by 18%. (2 pts.)
   1. Calculate Chidi’s cross-price elasticity of demand for bus tickets.

2. Does Chidi consider driving and taking the bus to be compliments or substitutes?

2. The price of dresses decreased 12%, which caused Tahani to increase the number of shoes she bought by 9% and decrease the number of skirts she bought by 15%. (5 pts.)
   1. Calculate Tahani’s cross-price elasticity of demand for shoes.

2. Does Tahani consider shoes to be a complement or substitute to dresses?

3. Calculate Tahani’s cross-price elasticity of demand for skirts.

4. Does Tahani consider skirts to be a complement or substitute to dresses?

5. Does Tahani consider shoes or skirts to be more closely related to dresses?

Answer 1

Cross price elasticity is calculated by dividing the % change in quantity demanded of good A by the % change in price of good B.

A negative cross elasticity denotes two products that are complements, while a positive cross elasticity denotes two substitute products. .

1. When the price of gas increased 5%, Chidi increased the number of bus tickets he purchased by 18%. (2 pts.)

Cross-price elasticity of demand for bus tickets is

=% change in quantity demanded of bus tickets/ % change in price of gas

= 18%/5%=3.6

Substitutes since the cross-price elasticity is positive. When the price of gas increases, quantity of bus tickets purchased increases.

2. The price of dresses decreased 12%, which caused Tahani to increase the number of shoes she bought by 9% and decrease the number of skirts she bought by 15%. (5 pts.)

1. Calculate Tahani’s cross-price elasticity of demand for shoes.

Cross-price elasticity of demand for shoes=

=% change in quantity demanded of shoes/ % change in price of dress

=9%/-12%=-0.75

2. Does Tahani consider shoes to be a complement or substitute to dresses?

Complement as the cross-price elasticity is negative. If the price of dresses go up, then demand for shoes goes down.

3. Calculate Tahani’s cross-price elasticity of demand for skirts.

=% change in quantity demanded of skirts/ % change in price of dress

=-15%/-12%=1.25

4. Substitute good as the coefficient is positive.

5. Shoes as it is a complementary good to dresses.