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Suppose the demand for coconut oil is [Math Processing Error]Q=1200−6p+15pp+0
Suppose the demand for coconut oil is [Math Processing Error]Q=1200−6p+15pp+0.1Y, where [Math Processing Error]p is the price of the coconut oil in cents per pound, [Math Processing Error]pp is the price of palm oil in cents per pound, and [Math Processing Error]Y is the income of consumers. Assume [Math Processing Error]p is initially $0.50 per pound and [Math Processing Error]pp is $0.30 per pound. Calculate the cross-price elasticity of demand for coconut oil. Provide an interpretation for this elasticity.
Expert Solution
The cross-price elasticity of demand for coconut oil in the given scenario is the percentage change in its quantity demanded on account of unit percentage change in the price of palm oil. Hence, the cross-price elasticity of coconut oil in the given scenario is same as the coefficient of palm oil's price (i.e. p_p), which is 15.
The cross-price elasticity of 15 implies that a unit percentage increase in the price of palm oil's price can lead to a 15% increase in the quantity demanded for the coconut oil. Thus, the coconut oil and the palm oil are substitute of each other.
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