Consider two goods peanut butter and jelly If the price of j

Consider two goods: peanut butter and jelly. If the price of jelly increases from $2 a and the quantity demanded of peanut butter decreases from 50 jars to 45 jars a. what is the cross elasticity of demand? Show your calculation. b. Are the goods substitutes or complements? 3. jar to $3 per jar

Solution

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Answer a) Price of jelly increases from $2 to $3 difference = $1 50% increase

                  Demand for peanut butter decreases from 50 jars to 45 jars. 10% decrease

Hence to calculate cross elasticity of demand = % change in quantity demanded/% change in price

Therefore cross elasticity of demand= 10%/50%= .2

Cross elasticity of demand =.2

Answer B. the two products are complement of each other. This can be established from the fact that the change/increases in price has made the demand for the other product to fall. This will happen only in case of the complement goods, this shows that the goods depend on each other. A change in price of one will lead to change in demand in the opposite direction.