The demand for coffee Qc in SDUs cafeteria depends on both t

The demand for coffee (Qc) in SDUs cafeteria depends on both the price of coffee (Pc) and Qc = 266-7 Pc + 0.5PT a) Calculate the price elasticity of the demand for coffee and the cross-price elasticity the price of tea (Pr). The demand function is given by: The price of coffee is Pc-10, and the price of tea is PT 8 b) Are the two goods complements or substitutes?

Solution

dQ_c/dP_c=-7

dQ_c/dP_T=0.5

Qc=266-7(10)+0.5(8)=200

1) price elasticity=(dQ_c/dP_c)*(P_c/Q_c)=-7*10/200=-0.35

Cross price elasticity=0.5*8/200=0.02

B) The two goods are substitutes because increase in price of T will decrease the demand of T and increase the demand of C. Thus T and C are substitue goods