Question

Assume QA = 4,900 - 60*PA + 10*PB, where QA is the quantity of good A...

Assume QA = 4,900 - 60*PA + 10*PB, where QA is the quantity of good A demanded, PA is the price of good A, and PB is the price of good B.

a) Suppose at first PA = $49 and PB = $50. Then the price of good A rises to PA' = $51 (while PB remains $50). Using the arc or midpoint formula, calculate the price elasticity of demand for good A.

ED =

b) Now suppose at first PA = $80 and PB = $38. Then the price of good B rises to PB' = $42 (while PA remains $80). Using the arc or midpoint formula, calculate the cross-price elasticity of demand between good A and good B.

EA,B =

c) Are goods A and B complements? Explain.

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Answer #1

midpoint formula for the price elasticity is given as

  

So,

QA = 4,900 - 60*PA + 10*PB

At, PA = $49    PB = $50    PA' = $51

2. cross-price elasticity3. since the cross elasticity is greater than 0. (0.79>0) hence two goods are not complement.

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