Question

When the price of gas increased 5%, Chidi increased the number of bus tickets he purchased...

  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.

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

  1. 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.

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

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

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

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

Homework Answers

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.

      1. 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

      1. 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.

      1. 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

      1. Substitute good as the coefficient is positive.
      1. Shoes as it is a complementary good to dresses.
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