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Find the cross price elasticity if app prices were reduced, from $12 to $10, and beverage sales increased, from 300 to 600
Find the cross price elasticity if app prices were reduced, from $12 to $10, and beverage sales increased, from 300 to 600.
Expert Solution
Given:
Initial Price of App (P0) = $12
New Price of App (P1) = $10
Percentage change in price of App = (P1 -P0)/ P0 * 100 = (10 - 12)/ 12 * 100
Percentage change in price of App = -16.67%
Initial Quantity demanded of beverage (Q0) = 300
New Quantity demanded of beverage (Q1) = 600
Percentage change in quantity demanded of beverage = (Q1 -Q0)/ Q0 * 100 = (600 - 300)/ 300 * 100
Percentage change in quantity demanded of beverage = 100%
Cross Price Elasticity of demand = Percentage change in the quantity demanded/ Percentage Change in price of related good
Cross Price Elasticity of demand = -100%/ 16.67% = -5.99
Thus the cross price elasticity between App and Beverage is -5.99. A negative value of elasticity indicates that, App and beverage are substitutes of each other.
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