Lab As 2018 Co111SL2 ECO 111 SL2 Summer Session 1 2018 Home

Lab As - 2018 Co-111-SL2 ECO 111 SL2 Summer Session 1 2018 Homework: Chapter 6 Homework Score: 0 of 1 pt Concept: Substitutes/Complements 16 of 21 (11 complete) Economist X. M. Gao and two colleagues have estimated that the cross-price elasticity of demand between beer and wine is 0.31 If so, then beer and wine are substitutes Gao and colleagues have estimated that the cross-price elastcity of demand between beer and spints is 0.15 If the price of spirits increases by 10 percent, then the quantity of beer demanded will by percent (Entor your response rounded to one decimal place,)

Solution

Cross Price elasticity of demand measures the responsiveness of quantity demanded of one good when price of another good is changed.

Cross price elasticity is positive for substitute goods as when price of one good increases then demand for other good increases(as in tea and coffee). And negative for complimentary goods as increase in price of one good leads to decrease in demand of other good(as in bread and butter).

Cross price elasticity is low for weak substitutes and high for strong substitutes as weak substitutes can\'t be substituted overnight but strong substitutes can.

So, by looking at the above description beer and wine are substitutes as the cross price elasticity is positive.

Cross price elasticity = % change in demand of one good /% change in price of other good.

Now cross price elasticity of beer and spirits is 0.15.

So these are also substitute goods.

so if price of spirits increase by 10% then quantity demanded for beer will increase as people will now prefer relatively cheaper option.

Now, for % change in quantity demanded(Q.D.) of beer ,

Cross price elasticity of beer and spirit = % change in Q. D. of beer / % change in price of spirit

0.15 = % change in Q . D. of beer /10%

0.15 *10 = % change in Q. D. of beer

= 1.5%