One winter recently the price of home healing oil increased

One winter recently, the price of home healing oil increased by 20 percent and the quantity demanded decreased by 2 percent, and with no change in the price of wool sweaters, the quantity of wool sweaters demanded increased by 10 percent. What is the cross elasticity of demand for wool sweaters with respect to the price of home healing oil? The cross elasticity of demand for wool sweaters with respect to the price of home heating oil is The cross elasticity of demand for wool sweaters respect to the price of home heating oil is Home heating oil and wool sweaters are because

Solution

The cross elasticity of demand canbe calculated as follows:

% change in the quantity demanded of good B / % change in price of good A

In the given problem

% change in quanity demanded of good B = 10% = 0.1

% change in the price of good A = 20% = 0.2

Cross elasticity of demand = 0.1/0.2 = 0.5

According to the theory of cross elasticity of demand if the value is greater than 0 then the two goods are good substitutes.

b. Option C is correct

Home heating oil and wool sweaters are substitutes because the cross elasticity of wool sweaters with respect to the price of the home heating oil is positive.