Finding Cross-Price Elasticity of Demand

Question

Tech Zone sells two types of tablets, A and B. Suppose that a 20% increase in the price of tablet A causes a 50% decrease in the quantity demanded for tablet A, a 10% increase in the quantity demanded for tablet B. What is the cross-price elasticity of demand for tablet B with respect to the price of tablet A? If necessary, round to the nearest two decimal points.

Answer 1

The cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good (here, tablet B) to a change in the price of another good (tablet A). It is calculated using the following formula:

(% Change in quantity demanded of B) / (% Change in price of A)

Given:

- Percentage change in the price of tablet A = +20% = 0.20

- Percentage change in the quantity demanded of tablet B = +10% = 0.10

Plugging these values into the formula:

Cross-price elasticity of demand = 0.10/0.20 = 0.5

Thus, the cross-price elasticity of demand for tablet B with respect to the price of tablet A is 0.50.

Since the cross-price elasticity is positive, this indicates that the two goods (tablet A and tablet B) are substitutes.