A report comes out that suggests red meat particularly beef

A report comes out that suggests red meat (particularly beef) is high in cholesterol and therefore bad for your health. The beef industry estimates this will have an effect on demand equivelant to an 8% price increase. calculate the % change in chicken prices and % change in chicken quanitity. Assume an elasticity of supply (chicken) of 2.5; an elasticity of demand (chicken) of -1.4; and a cross price of elasticity (chicken-beef) of 1.8 .

Solution

Cross-price elasticity (Chicken) = % Change in quantity of chicken / % Change in price of beef

1.8 = % Change in quantity of chicken / 8%

% Change in quantity of chicken = 8% x 1.8 = 14.4% (Increase in demand for chicken)

Elasticity of demand (Chicken) = % Change in quantity of chicken / % Change in price of chicken

-1.4 = 14.4% / % Change in price of chicken

% Change in price of chicken = 14.4% / (-1.4) = - 10.29% (Decrease in price of chicken)