Question

Suppose firms in an industry regard certain types of moderately skilled labor and advanced automation machinery as substitute goods with a cross-price elasticity of demand of 0.35. If over several years ongoing technology improvements lower the price of the machinery by 75%, what will be the change in quantity demanded by firms of this moderately skilled labor? Question 8 options:

a) -14.7%

b) -6.9%

c) -26.3%

d) -38.1%

Answer 1

As, We know Cross Price Elasticity of Demand is given by :-

As given question,

Cross-Price Elasticity of Demand = 0.35

Improvements in price = Increase in price = 75%

As, There is an increase in price so it will lead to fall in quantity demanded as per the law of demand. So their will be a negative sign with the percentage change in quantity demanded.

So, Change in quantity demanded by firms of moderately skilled labour = -26.3%

Hence, Option c) -26.3% is correct