I am having a difficult time answering this question and have been stuck on it for almost 2 weeks now.

Question

The manufacturers of Mark Dares handguns notice that when the price of 9mm ammo falls from $20 per box to $15 per box that sales of the Dares 17 rise from 10000 to 12000 units. What is cross elasticity of demand between Dares 17 and ammo. If an innovation for ammo makers means that ammo will be cheaper to produce in the future, how should Dares react?

Answer 1

ammo price drops 20 to 15

then

gun sales increase 10 to 12 thousand

ammo and guns are complementary goods, not substitutes

as people buy more ammo they buy more guns

as they buy more guns they buy more ammo

cross price elasticity measures the percentage change in sales of one good over the percentage change in price of the other good

20 to 15 is a 25% decrease

10 to 12 is a 20% increase

20/-25 = -4/5= -.8

Cross Elasticity= E = (change in Qx over Qx) divided by (change iin Py over Py)

change in Qx = 2 thousand

Qx = 10 thousand

change in Py = 5

Py = 20

Cross E = (2/10)/(-5/20) = -(2)(20)/(10(5) = -40/50 = -0.8