Assume the quantity demanded of strawberry jam fell by 2 whe

Assume the quantity demanded of strawberry jam fell by 2% when the price of peanut butter rose 10%. Calculate the cross-price elasticity of demand between tea and coffee. Are strawberry jam and peanut butter complements or substitutes?

Solution

% Increase in Price of Peanut butter: 10% % Decrease in demand of Strawberry Jam: -2% Cross elasticity demand = % change in demand of Jam/ % Change in Price of Peanut butter ( -2% /10 %) = -0.20 As there is a negative elassticity between the two variable, hence Strawberry Jam and Peanut Butter is Complimentary goods