3. Acme Tobacco is currently selling 5,000 pounds of pipe tobacco per year. Due to competitive pressures, the average price of a pipe declines from $15 to $12. As a result, the demand for Acme pipe tobacco increases to 6,000 pounds per year.
a. What is the cross elasticity of demand for pipes and pipe tobacco?
b. Assuming that the cross elasticity does not change, at what price of pipes would the demand for pipe tobacco be 3,000 pounds per year? Use $15 as the initial price.

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a. What is the cross elasticity of demand for pipes and pipe tobacco?
Sometimes the price of one good will shift the demand for another good. For example, an increase in the price of tea will increase the demand for coffee. This is measured by the cross-elasticity of demand. If the cross elasticity is positive, it means that an increase in the price of one good will increase the demand for the other good. If the price of digital cameras rose by 2% it will ...

Solution Summary

This discusses the steps to compute the cross elasticity of demand

... Q1 = original quantity demanded Q2 = new quantity demanded P1 = Original ... Ep=-1.00 Absolute value of elasticity is 1, arc price elasticity of demand is unit ...

... (c) If Mr. Miller spends all his income on steak (regardless of his income or the price of steak), his cross elasticity of demand between steak and any other ...

... (thetimes100, 2009) We can show this in a simple formula: Price elasticity demand = percentage change in quantity demanded divided by percentage change in the ...

... C. the cross price elasticity of demand= ---- ... Epx =. Where Epx = Coefficient of cross elasticity Q1 = original quantity demanded Q2 = new quantity ...

... It is calculated by using the formula: price elasticity of demand= percentage change in quantity demanded divided per percentage change in price. ...

... In economics, the price elasticity of demand (PED) is an elasticity that measures the responsiveness of the quantity demanded of a good to its price. ...